Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A large hospital is soliciting competitive bids from contractors for the construction of a new wing. The hospitals procurement auction will use a first-price sealed-bid

A large hospital is soliciting competitive bids from contractors for the construction of a new wing. The hospitals procurement auction will use a first-price sealed-bid mechanism. Your construction company plans to bid for this business.

You have data on the historical bid frequencies of the average bidder for construction jobs in this area. These data indicate that, for an average bidder, the proportion of relative bids that exceed a relative bid of 1.05 equals 0.84, and the proportion of relative bids that exceed a relative bid of 1.10 equals 0.70. However, for one particular competitor Rutledge Construction you estimate its likelihood of exceeding a relative bid of 1.05 equals 0.65 and its likelihood of exceeding a relative bid of 1.10 equals 0.50.

(a) Briefly describe the concept of expected value. Then, consider this situation: if the roll of a single die shows a 3, you will win $12, but if it shows any other number, you will win nothing. Given this situation, what is the maximum amount one should pay for a roll of the die? (Assume a roll of this die would show each of the numbers between 1 and 6 with equal likelihood.)

(b) In the procurement auction, you expect to be bidding against two average bidders and Rutledge Construction. Calculate the probability of your company winning the job with the relative bid of 1.05 and the probability of your company winning the job with the relative bid of 1.10. Show your work.

(c) You estimate that your companys costs to build the new hospital wing would be $750,000. Given your answers to Part (b), calculate the expected profit for your company of the relative bid of 1.05 and of the relative bid of 1.10. Show your work. Based on these calculations, which of these two relative bids should your company bid?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

More Books

Students also viewed these Finance questions

Question

=+What are the motivations behind your purchase decisions?

Answered: 1 week ago

Question

The board of directors has chosen (their, its) officers.

Answered: 1 week ago

Question

Which persons umbrella is this?

Answered: 1 week ago