Essay About 1950Win And Vacation Trip

Economics
Problem Set 8Problem 1 – Vacation Auction (from Kreps).Imagine you are taking part in an auction where the object being auctioned is a vacation trip. There are 15 other prospective buyers in addition to you. You have determined that the trip is worth $2000 to you: you would rather have the trip and pay some amount less than $2000 than to miss the trip and pay nothing, but you would rather miss the trip and pay nothing than take the trip if it costs more than $ 2000. You are indifferent between missing the trip and paying nothing and going on the trip and paying exactly $2000. So, your payoff is zero if you do not win the auction, and it is 2000-P if you win the trip and pay P.You have very little idea how much the trip is worth to the other 15 bidders and how they bid.Suppose this is a first price sealed bid auction. Does the strategy of bidding $1950 weakly dominate the strategy of bidding $2000 for you? With the information provided can you compare bidding $1950 and bidding $1960? Can you compare bidding $2000 and bidding an amount more than $2000?First price sealed bid auction: Here, we bid less than our actual valuation.Payoff table for bidding $1950 or $2000 is:                                  NOT WIN$1950                        $2000($50, 0)($50, 0)(0, 0)(0,0) $1950WIN$2000 So, the payoff ($50) if we bid $1950 is more than 0 which is the payoff if we bid $2000.    Payoff table comparing 1950 and 1960                                NOT WIN$1950                        $1960($50, 0)($50, 0)($40, 0)($40, 0) $1950WIN$1960Payoff ($50) for $1950 is more than payoff of $40 for $1960. Payoff comparing $2000 and amount more than $2000                               NOT WIN$2000                More than $2000(0, 0)(0, 0)(-$$, 0)(-$$,0) $2000WINMore than $2000Payoff ($0) for $2000 is zero which is better than loss for > $2000.Suppose now this is a second price auction. Why does the strategy of bidding $2000 weakly dominate every other strategy for you? In second price auction, bid will be for $2000 else would reduce chance of winning or  Payoff will be 0.                                       NOT WIN$2000                          More than $2000