Chapter 13: Auctions

MULTIPLE CHOICE
1.
a.
b.
c.
d.
e.
ANS: D
Auctions
MSC: Factual

As far as we know, auctions first emerged:

as e-commerce exploded in recent years.
when capitalism became a popular form of
economic organization.
after the emergence of communism, because
black markets were popular in centrally
planned economies.
in Babylonian marriage markets.
to increase efficiency in the trading of
commodities.
DIF: Easy

REF: 502

TOP: A Short History of

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.
ANS: D
Auctions
MSC: Factual
3.

DIF: Easy

REF: 502

TOP: A Short History of

In an English auction:

a.

buyers bid against each other with a

succession of increasingly higher prices
until only one remains.
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.
each bidder submits a price that is known
only to that bidder; bids are opened and the
highest (lowest) bid is accepted.
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.
none of the above.

b.

c.
d.

e.
ANS: A
DIF: Easy
TOP: Types of Auction Mechanisms
4.

In an English auction:

REF: 504
MSC: Factual

a.

the dominant strategy is to bid up to your

reservation price.
the dominant strategy is to bid beyond your
reservation price.
there is no dominant strategy.
the dominant strategy is to bid up to half of
your reservation price.
the dominant strategy is to maximize
expected utility.

b.
c.
d.
e.
ANS: A
DIF: Easy
TOP: Types of Auction Mechanisms
5.
a.
b.
c.
d.
e.

Which of the following is an example of an ascending-bid auction?

Sealed-bid auction.
Japanese auction.
Dutch auction.
Vickrey auction.
Rabbit auction.

ANS: B
DIF: Moderate
TOP: Types of Auction Mechanisms
6.

REF: 504
MSC: Factual

In a Dutch auction:

a.

buyers bid against each other with a

succession of increasingly higher prices
until only one remains.
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.
each bidder submits a price that is known
only to that bidder; bids are opened and the
highest (lowest) bid is accepted.
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.
none of the above.

b.

c.
d.

e.
ANS: B
DIF: Easy
TOP: Types of Auction Mechanisms
7.
a.
b.
c.
d.
e.

REF: 504
MSC: Factual

REF: 505
MSC: Factual

Which of the following is an example of a descending-bid auction?

Sealed-bid auction.
Japanese auction.
Dutch auction.
Vickrey auction.
Rabbit auction.

ANS: C
DIF: Easy
TOP: Types of Auction Mechanisms

REF: 505
MSC: Factual

8.

In a sealed-bid auction:

a.

buyers bid against each other with a

succession of increasingly higher prices
until only one remains.
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.
each bidder submits a price that is known
only to that bidder; bids are opened and the
highest (lowest) bid is accepted.
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.
none of the above.

b.

c.
d.

e.
ANS: C
DIF: Easy
TOP: Types of Auction Mechanisms
9.
a.
b.

c.
d.

e.

REF: 505
MSC: Factual

In a second-price, sealed-bid auction:

buyers bid against each other with a
succession of increasingly higher prices
until only one remains.
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.
each bidder submits a price that is known
only to that bidder; bids are opened and the
highest (lowest) bid is accepted.
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.
none of the above.

ANS: D
DIF: Easy
TOP: Types of Auction Mechanisms

REF: 505
MSC: Factual

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.
ANS: B
DIF: Easy
REF: 506
TOP: Auction Mechanism and Revenue Generation

MSC: Applied

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.
ANS: D
DIF: Easy
REF: 506
TOP: Auction Mechanism and Revenue Generation
12.
because:
a.

Second-price, sealed-bid auctions have rules that are incentive-compatible

they encourage buyers and sellers to
maximize profits.
they encourage buyers and sellers to collude
to fix the results of the auction.
they encourage individuals to reveal their
true preferences.
individual bidders are encouraged to work
with rivals to submit bids that maximize
joint profits.
each buyer is encouraged to submit the
same bid.

b.
c.
d.
e.
ANS: C
MSC: Factual
13.

MSC: Applied

DIF: Easy

REF: 507

TOP: Bidding Strategies

In a Dutch auction:

a.

the dominant strategy is to bid up to your

reservation price.
the dominant strategy is to bid beyond your
reservation price.
there is no dominant strategy.
the dominant strategy is to bid up to half of
your reservation price.
the dominant strategy is to maximize
expected utility.

b.
c.
d.
e.
ANS: C
MSC: Factual
14.
a.
b.
c.
d.
e.
ANS: E

DIF: Easy

REF: 507

TOP: Bidding Strategies

Regardless of the rules of an auction, the winner will pay:

his or her reservation price for the good at
auction.
the true value of the good at auction.
the expected value of the good at auction.
the maximum amount that he or she is
willing to pay for the good at auction.
the reservation price of the second highest
bidder for the good at auction.
DIF: Easy

REF: 507

TOP: Bidding Strategies

MSC: Factual
15.
What is the optimal bid for a descending-price auction if the bidders
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.
ANS: B
MSC: Applied

DIF: Easy

REF: 507

TOP: Bidding Strategies

16.
What is the optimal bid for a descending-price auction if the bidders
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.
ANS: C
MSC: Applied
17.
a.
b.
c.
d.
e.

ANS: A
MSC: Factual
18.
a.
b.
c.
d.
e.

DIF: Easy

REF: 507

TOP: Bidding Strategies

What is the optimal strategy in a second-price, sealed-bid auction?

Bid an amount that is equal to your
reservation price.
Bid an amount that is greater than your
reservation price because you will be
paying the second-highest bid if you win.
Bid an amount that is less than your
reservation price.
Bid an amount that is less than your
reservation price, depending on the number
of bidders.
If there are fewer than five bidders, bid
below your reservation price. Otherwise,
bid your reservation price.
DIF: Moderate

REF: 507

TOP: Bidding Strategies

Which of the following is the dominant strategy when bidding in an auction?

Bid less than your reservation price to earn
a larger surplus.
Bid more than your reservation price if you
really want to win the auction.
Never bid your reservation price, because
you will realize no surplus if you win the
auction.
Always bid up to, but not above, your
reservation price.
The dominant strategy depends on the type
of auction.

ANS: D
MSC: Conceptual
19.
provide:
a.
b.

DIF: Moderate

more surplus to the market.

more consumer surplus and less producer
surplus to the market.
more producer surplus and less consumer
surplus to the market.
less surplus to the market.
no change in the allocation of consumer and
producer surplus to the market.

d.
e.

20.
a.
b.
c.
d.
e.
ANS: D
Sellers
MSC: Factual

TOP: Bidding Strategies

Relative to the posted-price selling mechanism, an auction market will

c.

ANS: C
Sellers
MSC: Factual

REF: 507

DIF: Easy

REF: 510

TOP: Strategies for

The optimal reservation price for a seller is:

the value of the object being auctioned off if
it does not sell.
managerial estimates of the highest
reservation price among buyers.
managerial estimates of the lowest
reservation price among buyers.
the average of a and b.
equal to marginal cost.
DIF: Easy

REF: 510

TOP: Strategies for

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
ANS: E
Sellers
MSC: Factual

DIF: Easy

REF: 510

TOP: Strategies for

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.

a.
b.
c.
d.
e.

$0.
$99.
$297.
$100.
none of the above.

ANS: C
Sellers
MSC: Applied

DIF: Easy

REF: 510

TOP: Strategies for

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.
ANS: C
Sellers
MSC: Applied
24.
a.
b.
c.
d.
e.

DIF: Easy

25.

b.
c.
d.
e.

TOP: Strategies for

A reverse auction is one in which the:

price starts high and then is reduced until
only one bidder remains.
price starts low and then the seller raises
price until only one bidder remains.
price starts high and then is reduced until
only one seller remains.
price starts low and then the buyer raises the
price until only one seller remains.
bidders submit sealed bids for the right to
participate in the auction.

ANS: C
Sellers
MSC: Conceptual

a.

REF: 510

DIF: Moderate

REF: 510

TOP: Strategies for

Repurchase tender offers require sellers to:

submit a sealed bid indicating the minimum
amount that they would accept for their
shares.
submit a schedule indicating their
willingness to supply different numbers of
shares at different prices.
accept or reject the tender offer price
specified by the corporation.
contractually limit their opportunity to sell
shares on the open market.
purchase warrants that specify the future
price of shares.

ANS: B
Information
MSC: Factual
26.
a.
b.
c.
d.
e.
ANS: A
MSC: Factual

DIF: Easy

REF: 515

TOP: Value of

If bidders are likely to be risk-averse:

sellers should use a first-price auction.
sellers should use a second-price auction.
auctions will not provide surplus for sellers.
sellers should use a posted-price strategy.
Dutch auction rules will yield the greatest
profit to sellers.
DIF: Easy

REF: 518

TOP: Risk Aversion

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.
ANS: D
MSC: Factual
28.
a.
b.
c.
d.
e.
ANS: D
MSC: Factual
29.
a.
b.
c.
d.
e.

ANS: E

DIF: Easy

REF: 520

TOP: Winners Curse

The winners curse is an issue only when:

an auction is conducted by sealed bid.
an auction is an increasing value auction.
an auction is a decreasing bid auction.
the true value of the good or service being
auctioned is unknown.
bidders are able to collude.
DIF: Easy

REF: 520

TOP: Winners Curse

The winners curse occurs because:

competitors in auctions often make poor
bids.
there are too many competitors in most
auctions.
competitors in auctions usually make bids
that are below the expected value of the
prize.
sealed-bid auctions have too much
uncertainty attached to them.
the winning competitor in an auction will
make a bid that is greater than the average
bid.
DIF: Easy

REF: 520

TOP: Winners Curse

MSC: Factual
30.

The winners curse says that:

a.

the highest bidder in a competitive auction

is likely to realize negative profits.
the winner of any lottery is likely to realize
negative profits.
successful firms often lose their intensity
over time.
to stay first in its industry, a leader must
innovate constantly.
firms should strive to be second best.

b.
c.
d.
e.
ANS: A
MSC: Conceptual

DIF: Easy

REF: 520

TOP: Winners Curse