Self-paced
In one-round sealed-bid auctions, each prospective buyer submits in strict confidence a single bid, and the sale goes to the highest bidder. █ ███████ █████████ ███████ █████ █████ █████ █████ ████ ██ ██ ██████████ ██ ███ ██ ███ ██████ ██ ██████████ ███████ █ █████ ████ █████ ██ ██ ████████████ ███ ███ █████████ ████ ██ █ ██████ ███ ███████ ████ █████ ████ ██ ██ █████ ████ ██████████████ ████ ██████████ ██ ████ ██████ ████ █████████ █████████ █████ ███ █████████ ███ ████ ████
Summary
The stimulus tells us about a particular type of auction, where each bidder submits a single secret bid; the highest bidder then gets the sale. However, there's also something called a token bid, which is just a really low bid, banking on the hope that no one else will bid. Sellers can set a reserve price, i.e. a minimum bid needed for a sale to occur, to protect from token bids. And it seems that reserve prices are most needed for extremely desirable items.
Objective: Resolve the Paradox
This is the paradox we're trying to resolve: why would an extremely desirable item attract the highest risk of a token bid winning? Intuitively, we would think that such items would attract more bids, not fewer.
To resolve this paradox, we need to come up with a reason why people wouldn't place higher bids on extremely desirable items. For example, maybe potential bidders expect to be outbid in advance, so they just skip the auction. Whatever the answer, it will explain why reserve prices are more necessary for extremely desirable items.
25.
Which one of the following, ██ ████ █████ █████████ ██████████ █████████ ████ █████ ██ ███████ ███ ███ ██████████████ █████████████ █████ ██ ███████████ ██████
a
The bidder who █████████ ███ ███████ ███ ██ ██ ████ ███████ ██ █████ ████████ ██ ████ █████ ███████ ██████████ ██ ███ ████ ██ █████ ██ ███ ████████████ ███████
In other words, whoever wins the auction has to actually buy the item. But that doesn't explain why people aren't bidding on extremely desirable items in particular. Presumably the more people want the item, the more likely they would be to bid on it, so why isn't that happening?
b
The identity of ████████████ ███████ ██ ███ █████████ ██████ █████ ███████ ██████████ ██████ ██ ████████ ███
If anything, (B) offers a level of protection that would make people more likely to bid. They don't risk embarrassment if they lose as long as their identities are secret. This doesn't explain why anyone would be reluctant to bid on an extremely desirable item.
c
The reserve price ██ ██ █████████ █████████ ████ ██ █████████ ███ ████ ██████ ██ █████ █ ██████ ███ ███ ██████ ████ ██ ███ ███████ ███ ████ ███████ ███
This just makes sense—sellers want to make money, after all. But (C) still doesn't explain why the reserve price is necessary to begin with. We're really trying to explain bidding behavior here—why a token bid might actually win an extremely desirable item. (C) doesn't do that.
d
Prospective buyers of ██ █████████ █████████ ████ ███ █████ █████ █████ ██████████ ███ ██ █████ ████ ██ ███ █████ ███████████ ██████ ████
And if some prospective buyers know who else is a prospective buyer, so what? For (D) to resolve our paradox, we'd need to make all kinds of arbitrary assumptions. We don't have any reason to think that knowing other prospective buyers would influence someone's bidding behavior.
e
Prospective buyers tend ██ ███████ █████ ██ █████ ██ ██ ███████████ █ ███ ██ ██ █████████ █████████ ████ █████ ████ ██ ██ ██ ████ ██ ███ ██ ████ ████████ ██████
In other words, most prospective buyers psych themselves out and end up not bidding at all, because they think the item will go for an unreasonably high price. (E) explains why the reserve price is necessary: if prospective buyers all talk themselves out of bidding, then a token bid might actually win. And the more desirable the item is, the more likely this is to happen.