Consider an antique auction where bidders have independent private values. There are two bidders, each of whom perceives that valuations are uniformly distributed between $100 and $1,000. One of the bidders is Sue, who knows her own valuation is $200. What is Sue's optimal bidding strategy in a first-price, sealed-bid auction? A) Submit a bid of $150. B) Submit a bid of $200. C) Submit a bid that is less than $150. D) Yell "mine" when the bid reaches $150.

A) Submit a bid of $150.

Explanation:

In a first-price sealed auction, the bidders do not know their competitors' bids and the highest blind bid takes the prize. In this type of bidding, yelling "mine" is not an option. As for the value, if Sue values the antique at $200, in order to gain from the transaction, she should bid less than $200.

The optimal bidding for a neutral risk taker is given by:

Where 'v' is Sue's valuation, 'n' is the number of bidders, and 'L' is the lowest possible value:

Sue's optimal bidding strategy is A) Submit a bid of $150.

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