A seller knows that there are two bidders for the object he is selling.He believes that with probability 1/2, one has a buyer value of $5 and the other has a buyer value of $12 and, with probability 1/2, one has a buyer value of $10 and the other has a buyer value of $30.He knows that bidders will want to buy the object so long as they can get it for their buyer value or less.He sells it in an English auction with a reserve price which he must set before the auction starts.To maximize his expected profits, he should set the reserve price at
A)$30.
B)$5.
C)$12.
D)$10.
E)$20.

Question

Quizplus · Accepted Answer

The seller should set the reserve price at $30. This is because the highest possible buyer value is $30, and the seller wants to make sure that he gets at least that much for the object. If he sets the reserve price at any lower amount, he risks selling the object for less than its true value.

A Seller Knows That There Are Two Bidders for the Object