Chapter 13: Auctions
MULTIPLE CHOICE
1. As far as we know, auctions first emerged:
a.
as e-commerce exploded in recent years.
b.
when capitalism became a popular form of economic organization.
c.
after the emergence of communism, because black markets were popular in centrally
planned economies.
d.
in Babylonian marriage markets.
e.
to increase efficiency in the trading of commodities.
2. Herodotus, the Greek historian, wrote that ancient Babylonians engaged in auctions in which men
purchased:
a.
cattle.
b.
horses.
c.
grains of various sorts.
d.
wives.
e.
precious jewels.
3. In an English auction:
a.
buyers bid against each other with a succession of increasingly higher prices until only one
remains.
b.
a bid is announced, and if no buyer accepts the bid in a given period of time, a new,
slightly lower, bid is announced; this procedure continues until a bidder accepts the
announced price.
c.
each bidder submits a price that is known only to that bidder; bids are opened and the
highest (lowest) bid is accepted.
d.
each bidder submits a price that is known only to that bidder; bids are opened and the
highest (lowest) bidder wins, but the transaction occurs at the second highest (lowest)
price.
e.
none of the above.
4. In an English auction:
a.
the dominant strategy is to bid up to your reservation price.
b.
the dominant strategy is to bid beyond your reservation price.
c.
there is no dominant strategy.
d.
the dominant strategy is to bid up to half of your reservation price.
e.
the dominant strategy is to maximize expected utility.
5. Which of the following is an example of an ascending-bid auction?
a.
Sealed-bid auction.
b.
Japanese auction.
c.
Dutch auction.
d.
Vickrey auction.
e.
Rabbit auction.
6. In a Dutch auction:
a.
buyers bid against each other with a succession of increasingly higher prices until only one
remains.
b.
a bid is announced, and if no buyer accepts the bid in a given period of time, a new,
slightly lower, bid is announced; this procedure continues until a bidder accepts the
announced price.
c.
each bidder submits a price that is known only to that bidder; bids are opened and the
highest (lowest) bid is accepted.
d.
each bidder submits a price that is known only to that bidder; bids are opened and the
highest (lowest) bidder wins, but the transaction occurs at the second highest (lowest)
price.
e.
none of the above.
7. Which of the following is an example of a descending-bid auction?
a.
Sealed-bid auction.
b.
Japanese auction.
c.
Dutch auction.
d.
Vickrey auction.
e.
Rabbit auction.
8. In a sealed-bid auction:
a.
buyers bid against each other with a succession of increasingly higher prices until only one
remains.
b.
a bid is announced, and if no buyer accepts the bid in a given period of time, a new,
slightly lower, bid is announced; this procedure continues until a bidder accepts the
announced price.
c.
each bidder submits a price that is known only to that bidder; bids are opened and the
highest (lowest) bid is accepted.
d.
each bidder submits a price that is known only to that bidder; bids are opened and the
highest (lowest) bidder wins, but the transaction occurs at the second highest (lowest)
price.
e.
none of the above.
9. In a second-price, sealed-bid auction:
a.
buyers bid against each other with a succession of increasingly higher prices until only one
remains.
b.
a bid is announced, and if no buyer accepts the bid in a given period of time, a new,
slightly lower, bid is announced; this procedure continues until a bidder accepts the
announced price.
c.
each bidder submits a price that is known only to that bidder; bids are opened and the
highest (lowest) bid is accepted.
d.
each bidder submits a price that is known only to that bidder; bids are opened and the
highest (lowest) bidder wins, but the transaction occurs at the second highest (lowest)
price.
e.
none of the above.
10. Betty has bid $2,000 on a painting that she is buying for investment purposes. If she has a 40% chance
of winning the auction and the price paid by the auction winner is $1,500, the expected profit of the
auction is:
a.
$0.
b.
$200.
c.
$500.
d.
$800.
e.
$2,000.
11. Eddie is auctioning a Willie Mays baseball card. If the expected profit from the auction is $10,000 and
the probability of a win is 10%, the surplus to be split between buyer and seller is:
a.
$0.
b.
$1,000.
c.
$10,000.
d.
$100,000.
e.
none of the above.
12. Second-price, sealed-bid auctions have rules that are incentive-compatible because:
a.
they encourage buyers and sellers to maximize profits.
b.
they encourage buyers and sellers to collude to fix the results of the auction.
c.
they encourage individuals to reveal their true preferences.
d.
individual bidders are encouraged to work with rivals to submit bids that maximize joint
profits.
e.
each buyer is encouraged to submit the same bid.
13. In a Dutch auction:
a.
the dominant strategy is to bid up to your reservation price.
b.
the dominant strategy is to bid beyond your reservation price.
c.
there is no dominant strategy.
d.
the dominant strategy is to bid up to half of your reservation price.
e.
the dominant strategy is to maximize expected utility.
14. Regardless of the rules of an auction, the winner will pay:
a.
his or her reservation price for the good at auction.
b.
the true value of the good at auction.
c.
the expected value of the good at auction.
d.
the maximum amount that he or she is willing to pay for the good at auction.
e.
the reservation price of the second highest bidder for the good at auction.
15. What is the optimal bid for a descending-price auction if the bidder’s reservation price is 8, the lowest
possible bid is 2, and there are three bidders?
a.
2.
b.
6.
c.
7.
d.
8.
e.
None of the above.
16. What is the optimal bid for a descending-price auction if the bidder’s reservation price is 8, the lowest
possible bid is 3, and there are five bidders?
a.
3.
b.
6.
c.
7.
d.
8.
e.
None of the above.
17. What is the optimal strategy in a second-price, sealed-bid auction?
a.
Bid an amount that is equal to your reservation price.
b.
Bid an amount that is greater than your reservation price because you will be paying the
second-highest bid if you win.
c.
Bid an amount that is less than your reservation price.
d.
Bid an amount that is less than your reservation price, depending on the number of
bidders.
e.
If there are fewer than five bidders, bid below your reservation price. Otherwise, bid your
reservation price.
18. Which of the following is the dominant strategy when bidding in an auction?
a.
Bid less than your reservation price to earn a larger surplus.
b.
Bid more than your reservation price if you really want to win the auction.
c.
Never bid your reservation price, because you will realize no surplus if you win the
auction.
d.
Always bid up to, but not above, your reservation price.
e.
The dominant strategy depends on the type of auction.
19. Relative to the posted-price selling mechanism, an auction market will provide:
a.
more surplus to the market.
b.
more consumer surplus and less producer surplus to the market.
c.
more producer surplus and less consumer surplus to the market.
d.
less surplus to the market.
e.
no change in the allocation of consumer and producer surplus to the market.
20. The optimal reservation price for a seller is:
a.
the value of the object being auctioned off if it does not sell.
b.
managerial estimates of the highest reservation price among buyers.
c.
managerial estimates of the lowest reservation price among buyers.
d.
the average of a and b.
e.
equal to marginal cost.
21. In recent years, auction sites, such as ebay, have flooded the Internet. Sellers expect to gain by using
the Internet for conducting auctions because:
a.
more bidders means that price discrimination is an option.
b.
with more bidders, each submits a bid closer to his or her reservation price to increase the
probability of a win.
c.
with more bidders, sellers expect to realize greater profits.
d.
consumer surplus will increase.
e.
b and c
22. The following table describes the reservation prices and four bids for an auction of three tickets to the
recent Madonna concert.
The total consumer surplus that results from this auction is:
a.
$0.
b.
$99.
c.
$297.
d.
$100.
e.
none of the above.
23. The following table describes the reservation prices and four bids for an auction of three tickets to the
recent Madonna concert.
If the marginal cost of providing a seat for one more Madonna fan is $0, the total producer surplus that
results from this auction is:
a.
$0.
b.
$297.
c.
$1,803.
d.
$2,100.
e.
none of the above.
24. A reverse auction is one in which the:
a.
price starts high and then is reduced until only one bidder remains.
b.
price starts low and then the seller raises price until only one bidder remains.
c.
price starts high and then is reduced until only one seller remains.
d.
price starts low and then the buyer raises the price until only one seller remains.
e.
bidders submit sealed bids for the right to participate in the auction.
25. Repurchase tender offers require sellers to:
a.
submit a sealed bid indicating the minimum amount that they would accept for their
shares.
b.
submit a schedule indicating their willingness to supply different numbers of shares at
different prices.
c.
accept or reject the tender offer price specified by the corporation.
d.
contractually limit their opportunity to sell shares on the open market.
e.
purchase warrants that specify the future price of shares.
26. If bidders are likely to be risk-averse:
a.
sellers should use a first-price auction.
b.
sellers should use a second-price auction.
c.
auctions will not provide surplus for sellers.
d.
sellers should use a posted-price strategy.
e.
Dutch auction rules will yield the greatest profit to sellers.
27. When significant uncertainty exists surrounding the true value of an object at auction, buyers
contemplating a bid should bid less when:
a.
they have less information about the true value of the item.
b.
they are less confident in their own estimates of the true value of the object.
c.
there are many other buyers bidding against them.
d.
all of the above.
e.
none of the above.
28. The winner’s curse is an issue only when:
a.
an auction is conducted by sealed bid.
b.
an auction is an increasing value auction.
c.
an auction is a decreasing bid auction.
d.
the true value of the good or service being auctioned is unknown.
e.
bidders are able to collude.
29. The winner’s curse occurs because:
a.
competitors in auctions often make poor bids.
b.
there are too many competitors in most auctions.
c.
competitors in auctions usually make bids that are below the expected value of the prize.
d.
sealed-bid auctions have too much uncertainty attached to them.
e.
the winning competitor in an auction will make a bid that is greater than the average bid.
30. The winner’s curse says that:
a.
the highest bidder in a competitive auction is likely to realize negative profits.
b.
the winner of any lottery is likely to realize negative profits.
c.
successful firms often lose their intensity over time.
d.
to stay first in its industry, a leader must innovate constantly.
e.
firms should strive to be second best.