Suppose you are a seller in a multi-unit procurement auction (one buyer many sellers). The auction environment is very competitive so that none of the bidders have any market power. The auctioneer will rank the bids from lowest to highest and accept the lowest bids to meet the buyers demand. The price paid to you as a seller for each accepted unit depends on your bids and the auction type (i.e. discriminatory or uniform price). You have 6 units, and increasing marginal costs of production so that the per-unit cost for each unit is as follows:

Unit number - cost

1 - 5

2 - 5.65

3 - 5.85

4 - 6.15

5 - 7

You, have done a careful analysis of the supply and demand conditions in the market. She calculated that around 85% of the units in the auction will be needed to meet the demand of the buyer. She further predicts that the 85th percentile of marginal costs among all the sellers should be close to $6.05.

1. Write down the amount that you would bid for each of the 5 units to maximize profits in a discriminatory (pay-as-bid) auction. Explain why this is a profit-maximizing strategy.

2. Write down the amount you would bid for each of the 5 units to maximize profits in a uniform price auction. Explain why this is a profit-maximizing strategy.