Strasse investors’ buys real estate, develops it, and resells it for a profit. A new property is available, and Bud Srassel, the President and owner of Strassel investors, believes it can be sold for $160,000. The current property owner asked for bids and stated that the property will be sold for the highest bid in excess of $100,000. Two competitors will be submitting bids for the property. Strassel does not know what the competitors will bid, but he assumes for planning purposes that the amount bid by each competitor will be uniformly distributed between $100,000 and $150,000.
A.Develop a worksheet that can be used to simulate the bids made by the two competitors. Strassel is considering a bid of $130,000 for the property. Using a simulation of 1000 trials, what is the estimate of the probability Strassel will be able to obtain the property using a bid of $130,000?
B. How much does Strassel need to bid to be assured of obtaining the property? What is the profit associated with this bid?
C.Use the simulation model to compute the profit for each trial of the simulation run. With maximization of profit as Strassel’s objective, use simulation to evaluate Strassel’s bid alternatives of $130,000, $140,000 or $150,000. What is the recommended bid, and what is the expected profit?
A. To simulate the bids made by the two competitors, we can generate random numbers between $100,000 and $150,000 uniformly. We can repeat this process 1000 times to simulate 1000 trials. Then, we can compare each competitor's bid with Strassel's bid of $130,000 to determine if he obtains the property.
Here is a possible format for the worksheet:
| Trial | Competitor 1 Bid | Competitor 2 Bid | Strassel's Bid | Property Obtained? |
|-------|-----------------|-----------------|----------------|--------------------|
| 1 | random number | random number | $130,000 | Yes |
| 2 | random number | random number | $130,000 | No |
| 3 | random number | random number | $130,000 | Yes |
| ... | ... | ... | ... | ... |
| 1000 | random number | random number | $130,000 | No |
To estimate the probability of Strassel obtaining the property with a bid of $130,000, we can count the number of trials where he obtained the property and divide it by the total number of trials (1000). This will give us the estimate of the probability.
B. To be assured of obtaining the property, Strassel needs to bid higher than any potential bid from the competitors. Since we assume the competitors' bids are uniformly distributed between $100,000 and $150,000, Strassel's bid should be higher than $150,000. In this case, Strassel's bid should be $150,001 to ensure he obtains the property. The profit associated with this bid can be calculated by subtracting the cost of the property from the selling price, which is $160,000 - $150,001 = $9,999.
C. To determine the recommended bid with maximization of profit as Strassel's objective, we can simulate the profit for each trial of the simulation run using different bid alternatives - $130,000, $140,000, and $150,000.
For each trial, we can calculate the profit by subtracting the cost of the property (Strassel's bid) from the selling price of $160,000. We repeat this process for each trial and calculate the average profit for each bid alternative.
The recommended bid would be the one that results in the highest average profit. We can compare the average profits for each bid alternative and choose the one with the highest value as the recommended bid.