Asymmetric Information “It’s a slam dunk, Boss”

You have a chance to bid on some colored plastic chips. The chips are drawn one at a time from a barrel with equal numbers of red and blue chips and replaced after they are drawn. You can bid on the chips as they are drawn, but you don’t get to look at the chip before you bid. You can sell the blue chips for $10 each. Red chips are worthless. You don’t get to look at the chips before you bid. If you did this 1000 times, what is the most that you could bid per chip and expect on average not to lose money?

You have a chance to bid on some colored plastic chips. Chips are drawn one at a time from a barrel with equal numbers of red and blue chips and replaced after each draw. Blue chips are worth $10 each. Red chips are worth $0. You don’t get to look at the chips before you bid. A competing bidder does get to look. He will bid $6 for each blue chip and $0 for a reds. Each chip is sold to the high bidder. If you bid $4 per chip, you will A) certainly make a profit. B) make a profit on average but might lose money. C) make a loss on average but might profit. D) certainly lose money.

You have a chance to bid on some colored plastic chips. Chips are drawn one at a time from a barrel with equal numbers of red and blue chips and replaced after each draw. Blue chips are worth $10 each. Red chips are worth $0. You don’t get to look at the chips before you bid. A competing bidder does get to look. He will bid $6 for each blue chip and $0 for a reds. If you had to enter this auction 1000 times and make the same bid every time, what is the most that you would be willing to bid for a chip?

Announcements Class will not meet on Friday, March 16. If your last name begins with B or V, take your final exam in Chemistry All others take it here. You must bring a photo ID. Homework 12 this week. Not to be turned in. Don’t forget to take psychological tests on class website.

And on to our lecture…