Scenario: John, Jacob, Alex, and Maria participate in a first-price auction for an iPod. John values the iPod at $400, Jacob values it at $300, Alex values it at $250, and Maria values it at $200.
-Refer to the scenario above.The winner of this auction will earn a surplus of ________ if he or she follows his or her dominant strategy.
A) $100
B) $300
C) $400
D) $200

Question

Quizplus · Accepted Answer

The winner of the auction will be the person with the highest valuation of the iPod. In this case, John has the highest valuation at $400. To earn a surplus, the winner should bid just slightly above the second-highest valuation, which is $300 by Jacob. Therefore, the winning bid will be slightly above $300, which means the winner will pay less than their valuation for the iPod, resulting in a surplus of $100. Thus, the dominant strategy for the winner is to bid just over $300, which would result in a surplus of $100.

Scenario: John, Jacob, Alex, and Maria Participate in a First-Price