Question

Suppose we are interested in bidding on a piece of land and we know one other bidder isinterested. The seller announced that the highest bid in excess of $10,000 will be accepted.Assume that the competitor’s bid x is a random variable that is uniformly distributedbetween $10,000 and $15,000.a. Suppose you bid $12,000. What is the probability that your bid will be accepted?b. Suppose you bid $14,000. What is the probability that your bid will be accepted?c. What amount should you bid to maximize the probability that you get theproperty?d. Suppose you know someone who is willing to pay you $16,000 for the property. Wouldyou consider bidding less than the amount in part (c)? Why or why not?

Answer 1

Answer:

a. 0.4 = 40% probability that your bid will be accepted

b. 0.8 = 80% probability that your bid will be accepted.

c. $15,000.

d. Bidding $15,000 guarantees you a profit of $1,000, while trying to bid less than $15,000, you can end up without a profit, thus, you should not consider bidding less than the amount in part (c).

Step-by-step explanation:

Uniform probability distribution:

An uniform distribution has two bounds, a and b.

The probability of finding a value of at lower than x is:

$P(X < x) = \frac{x - a}{b - a}$

Assume that the competitor’s bid x is a random variable that is uniformly distributed between $10,000 and $15,000.

This means that $a = 10, b = 15$, considering the measures in thousands of dollars.

a. Suppose you bid $12,000. What is the probability that your bid will be accepted?

Probability that the other bidder's bid is less than 12000(X < 12). So

$P(X < 12) = \frac{12 - 10}{15 - 10} = \frac{2}{5} = 0.4$

0.4 = 40% probability that your bid will be accepted.

b. Suppose you bid $14,000. What is the probability that your bid will be accepted?

Probability that the other bidder's bid is less than 14000(X < 14). So

$P(X < 14) = \frac{14 - 10}{15 - 10} = \frac{4}{5} = 0.8$

0.8 = 80% probability that your bid will be accepted.

c. What amount should you bid to maximize the probability that you get the property?

The upper bound of the uniform distribution, that is, $15,000.

d. Suppose you know someone who is willing to pay you $16,000 for the property. Would you consider bidding less than the amount in part (c)? Why or why not?

Bidding $15,000 guarantees you a profit of $1,000, while trying to bid less than $15,000, you can end up without a profit, thus, you should not consider bidding less than the amount in part (c).