Q1:

In Sweden, firms that fail to meet their debt obligations are immediately auctioned off to the highest bidder. (There is no reorganization through Chapter 11 bankruptcy.) The current managers are often the high bidders for the company. (Hint: Assume these auctions are common-value auctions.)

Suppose for a particular auction, the current managers have placed a bid of $4 million.

True or False: Bidding significantly higher than $4 million will likely result in you suffering from the winner's curse.

A.) True

B.) False

Q2:

Alyssa Green estimates the cost of future projects for a large contracting firm. Alyssa uses precisely the same techniques to estimate the costs of every potential job and formulates bids by adding a standard profit markup. For some companies, to which the firm offers its services, there are no competitors also seeking their business, so Alyssa's company is almost certain to get these companies as clients. For these jobs, Alyssa finds that her cost estimates are right, on average. For jobs where competitors are also vying for the business, Alyssa finds that they almost always end up costing more than she estimates.

True or False: Alyssa is less likely to win the jobs where she underestimates the costs, causing her to experience the winner's curse.

A.) False

B.) True

Q3:

When a famous painting becomes available for sale, it is often known which museum or collector will be the likely winner. Yet, the auctioneer actively woos representatives of other museums that have no chance of winning to attend anyway. Suppose a piece of art has recently become available for sale and will be auctioned OFF to the highest bidder, with the winner paying an amount equal to the second highest bid. Assume that most collectors know that Caroline places a value of $100,000 on the art piece and that she values this art $100,000 piece more than any other collector. Suppose that if no one else shows up, Caroline simply bids 2 The expected price paid by Caroline, with no other bidders present, is . Suppose the owner of the artwork manages to recruit another bidder, Dmitri, to the auction. Dmitri is known to value the art piece at $80,000. The expected price paid by Caroline, given the presence of the second bidder Dmitri, is . = $50,000 and wins the piece ofart