2. Individual Problems 18-2

A reserve price is a minimum price set by the auctioneer. If no bidder is willing to pay the reserve price, the item is unsold at a profit of $0 for the auctioneer. If only one bidder values the item at or above the reserve price, that bidder pays the reserve price. An auctioneer faces two bidders, each with a value of either $9 or $24, with both values equally probable. Without a reserve price, the second highest bid will be the price paid by the winning bidder.

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The following table lists the four possible combinations of bidder values. Each combination is equally likely to occur.

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Without a reserve price, the expected price is $______ . With a reserve price of $24, the expected price is $ ______ . Thus, the expected price is larger (with or without) the reserve price.

On the following table, indicate the price paid by the winning bidder with and without the stated reserve price