Question
Suppose that you own a TAG Heuer watch that you could sell to a jewelry store for $1,000 at any time if you wanted to
Suppose that you own a TAG Heuer watch that you could sell to a jewelry store for $1,000 at any time if you wanted to do so. Also, suppose your utility function for money is U = (M)2. a) You are considering auctioning your watch on Ebay. There were two identical watches to the one you own that were auctioned the previous week, and you believe that it is equally likely that you will receive either of these past two final auction prices. If the first watch was auctioned for $780 and the second watch was auctioned for $1,200, what is the expected value of the Ebay auction for your watch? b) Based on what you are told in part b) will you put your watch up for auction on Ebay if the listing fee is $20? How do you know? c) Irrespective of your answer for part c), suppose you do put your watch up for auction on Ebay and specify a Buy it now option where you will agree to end the auction early if someone agrees to pay the Buy it now price. What is the minimum Buy it now price that you would be willing to accept given what you are told in part b) about the likely outcome of the auction (Again, assume there is a $20 listing fee)?
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