You and two other people are to place bids for an object, with the high bid winning. If you win, you plan to sell the object immediately for 10,000. (a) How much should you bid to maximize your expected profit if you believe that the bids of the others can be regarded as being independent and uniformly distributed between 7,000 and 10,000? (b) How much should you bid to maximize your expected profit if you believe that the bids of the others can be regarded as identical and uniformly distributed between 7,000 and 10,000?
Continuous Probability Distributions
Probability distributions are of two types, which are continuous probability distributions and discrete probability distributions. A continuous probability distribution contains an infinite number of values. For example, if time is infinite: you could count from 0 to a trillion seconds, billion seconds, so on indefinitely. A discrete probability distribution consists of only a countable set of possible values.
Normal Distribution
Suppose we had to design a bathroom weighing scale, how would we decide what should be the range of the weighing machine? Would we take the highest recorded human weight in history and use that as the upper limit for our weighing scale? This may not be a great idea as the sensitivity of the scale would get reduced if the range is too large. At the same time, if we keep the upper limit too low, it may not be usable for a large percentage of the population!
You and two other people are to place bids for an object, with the high bid winning. If you win, you plan to sell the object immediately for 10,000.
(a) How much should you bid to maximize your expected profit if you believe that the bids of the others can be regarded as being independent and uniformly distributed between 7,000 and 10,000?
(b) How much should you bid to maximize your expected profit if you believe that the bids of the others can be regarded as identical and uniformly distributed between 7,000 and 10,000?
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