a.in an auction, potential buyers compete for a good by submitting bids. adam compared ebay auctions in which the same good was sold. he founf that,on average, the larger the number of bidders, the higher the sales price. for example, in two auctions of identical ipods, the one with the lrger number of bidders brought a higher selling price. according to adam, this explain why smart sellers on ebay set absurdly low opening prices(the lowest price that the seller will accept), such as 1 cent for a new ipod. use the concepts of consumer and producer surplus to explain adam's reasoning.
b. you are considering selling your vintage 1969 convertible volkswagen beetle. if the car is in good condition, it is worth a lot; if it is in poor condition, it is useful only as scrap. assume that your car is in excellent condition but that it costs a potential buyer $500 for an inspection to learn the car's condition. use what you learned in part a to explain whether ot not you should pay for an inspection and share the results with all interested buyers.
a. Adam's reasoning can be explained using the concepts of consumer and producer surplus. In an auction, the consumer surplus is the difference between the maximum price a buyer is willing to pay for a good and the price they actually end up paying. On the other hand, the producer surplus is the difference between the minimum price a seller is willing to accept and the price at which they sell the good.
By setting an absurdly low opening price, such as 1 cent, the seller is attracting a larger number of bidders. This increases the competition among the buyers, leading to higher bids and ultimately a higher selling price. When there are more bidders competing, the demand for the good increases, which pushes the price up. As a result, the seller can potentially benefit from a higher producer surplus.
Additionally, by attracting more bidders, the seller is increasing the likelihood of a higher sales price, which in turn can generate positive word-of-mouth and attract more potential buyers in the future. It creates a perception of a competitive and desirable marketplace, leading to more interest and higher prices.
b. In this scenario, it would not be optimal for you to pay for an inspection and share the results with all interested buyers. Since the potential buyer would have to pay $500 for the inspection, it could deter potential buyers from participating in the auction or making an offer.
Based on what we learned in part a, attracting a larger number of bidders by setting a low opening price would create more competition and potentially increase the selling price. However, in this case, paying for the inspection and sharing the results would act as a deterrent for potential buyers due to the additional cost they would have to bear.
It would be more efficient to let potential buyers inspect the car themselves or hire their own inspectors if they desire, as this minimizes the cost for both you and the potential buyers. By allowing them to determine the condition of the car on their own terms, they can better evaluate its value and make more informed decisions.