Bidding on a painting worth a uniform amount
Question
A painting's true worth is uniformly distributed on dollars, and you do not know . You submit a single bid ; if you buy the painting for and immediately resell it to a museum for , otherwise nothing happens. What bid maximises your expected profit? (Answer if no bid gives a positive expected profit.)
Short answer
Bid . Winning with bid tells you , so conditionally is uniform on with mean and the resale is worth on average. You always pay more than you expect to recoup, so any positive bid has negative expected profit (winner's curse).
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Open the worked solutionLessons behind this question
- Expectation, Mean, and Variance
- Conditional Expectation and Variance Revisited
- Continuous Random Variables and Probability Density Functions
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