#### Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

# PTA.S1.Q25 - One-round sealed-bid auction (LR) Can someone explain why E is correct?

Alum Member
edited August 2021 307 karma

I got it correct by POE, but I was enticed by A and even after getting it right I still don't 100% understand. 7Sage doesn't have explanations for this test. Thanks in advance!

Admin Note: Edited title. Please use the format: "PT#.S#.Q# - brief description of the question"

• Alum Member
edited August 2021 500 karma

-edits for clarity and such-

This question is awful. The question stem is what really makes the answer choice correct. It wants us to explain why what was presented to us is considered a paradox. We aren't really reconciling anything and I think that is in part what makes this question tricky

E is correct. This answer seems completely irrelevant and stupid, but it isn't. It actually plays with the details in the stimulus. The stimulus lays out a situation in which we presume a low bid is placed because no one else wants it. That 'token bid' will win if there isn't a reserve price and they can walk away underpaying for an item. E.g. an item is worth 50 dollars. The person bids 10 dollars thinking no one else will bid because it's ugly. There is no reserve price, so they win for 10 dollars.

In the situation with E, we have a similar, but opposite scenario. We have a highly desirable item and the only way to win the bid would be if the bid made no economic sense, i.e. no one will bid on it. So say, the presumption is that one would have to bid at least 600 million dollars on the item for a chance to win. This severely limits the number of people from buying. Now, if a 'token bid' comes in low, it too will be a gamble that there are no other bids (because it makes no economic sense). They can the win the 600 million dollar item for 100 dollars. It's the same scenario.

This is why it's 'characterized as a paradox'. It applies to both scenarios.

The other choices:

A) Whether a bidder could accept or decline a bid doesn't explain why you would need a reserve price. Reserve prices are set to prevent a sale if there is a token low bid, not if someone revokes their bid.

B ) We don't care who the bidders are. This is similar to answer D.

C) This seems like the hardest answer to cross off, but I think the reason we can do so is because it explains why someone might use the a reserve price, but it doesn't explain the paradox of why reserve prices could be used for the most desirable items and to prevent low bids.

D) This is irrelevant. We don't care who the others are. It doesn't help explain anything.