In a sealed-bid auction, a firm with a reservation price of $480,000 submits a bid of $400,000. If its probability of winning is .75, then its expected profit from the auction is:
A) $60,000
B) $75,000
C) $80,000
D) $300,000
E) There is not enough information to provide an answer.

Question

Quizplus · Accepted Answer

The expected profit is calculated as the probability of winning multiplied by the difference between the reservation price and the bid: 0.75 * ($480,000 - $400,000) = $60,000.

In a Sealed-Bid Auction, a Firm with a Reservation Price