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Darya [45]
3 years ago
15

Consider a second-price, sealed-bid auction with a seller who has one unit of the object which he values at s and two buyers 1,

2 who have values of v1 and v2 for the object. The values s, v1, v2 are all independent, private values. Suppose that both buyers know that the seller will submit his own sealed bid of s (and will keep the item if bid s wins), but they do not know the value of s. The buyers know that the seller must submit his bid before seeing the buyer’s bids and they know that the seller will actually run a second price auction with the three bids he has: his own bid and the two buyer’s bids. Each buyer knows his own value but not the other buyer’s value.
Now suppose that the seller opens the bids from the buyers and then submits his own bid after seeing the bids from the two buyers. The seller runs a second price auction with these bids in the sense that the object is awarded to the highests bidder (one of the two buyers or the seller) and that bidder pays the second highest bid. Now is it optimal for the buyers to bid truthfully; that is, should they each bid their true value? Give a brief explanation for your answer.
Business
1 answer:
dybincka [34]3 years ago
5 0

Answer and Explanation:

Given that this is a second price bid auction whereby the second highest bid is the price that the highest bidder pays for the item up for auction sale, so that b1>b2 then b1 gets item for the price of b2.

Truthfulness of true value is the dominant strategy here which means each player should aim to be truthful with their bid regarding their true value regardless of what other bidders are bidding. Therefore truthfulness of value is the optimal strategy with the best payoff for bidders

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Answer:

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D2= Do(1+g)2 = $2(1+0.1)2 = $2.42

PHASE 1

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V1 = 2.20/(1+0.11) + 2.42/(1+0.11)2  

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PHASE 2

V2 = DN(1+g)/ (Ke-g )(1+k e)n                                                                                                                                                                                                                                        V2 = $2.42(1+0.03)/(0.11-0.03)(1+0.11)2      

V2 = $2.4926/$0.0649

V2 = $38.4068

The current stock price is calculated as follows:

Po = V1 + V2

Po = $3.9461 + $38.4068

Po = $42.35

Explanation: This question relates to valuation of shares with 2-phase growth model.  The value of shares in the first phase will be determined by discounting the dividend for the 2 years by cost of equity. The dividends for year 1 and year 2 were obtained by subjecting the current dividend paid (Do) to growth rate.  

Moreso, the value of shares for the second phase was calculated by considering the last dividend paid(D2) and then subject it to the new growth rate. The adjusted dividend was then capitalized at the appropriate discount rate of the company.

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Answer:

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