winner's curse Table 16.2 summarizes the bidding illustration for the case of a = 0 and ~ = y

= 10. Plot firm l's bid as a function ofy. Also plot firm l's expectedcost, given it hasobselVed y, on the same graph. Finally, plot firm 1 'sexpectedeost, given it has obselVed y, bid as noted, and won the bidding.

aJ Carefully explain the relationship among the three graphs.

b] We interpret this as an instance of eost pIus pricingo Assume eost is defined as in the seeond graph, i.e., as firm l' s expected eost given it has obselVed y. What explains the amount that is added to this eost estimate to determine firm 1 's bid?

AppendixLO1