You should not bid anything above $500,000 for this house. If you bid $750,000, then you will
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You should not bid anything above $500,000 for this house. If you bid $750,000, then you will get the house only if it is worth $500,000, and you would therefore earn $500,000/$750,000 −1 =−33%. The other half of the time, you would not be the highest bidder so your rate of return would be 0%. Thus, your expected rate of return would be 50% . (−33%) + 50% . 0% = −16.7%.
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