Suppose you are the economic advisor for a firm that is trying to decide whether to acquire Bumbler Oil Company, whose only asset is an oil field that has a net value X under its current management. The owners of Bumbler know the exact value of X but your company knows only that X is a random number that is uniformly distributed between 0 and 100. Because of your company’s superior management, Bumbler’s oil field would be worth X + 40 in its hands.
a. What is the most your company can bid and not expect to take a loss?
b. Assuming your company is the only bidder, what bid maximizes your company’s expected profits?

  • CreatedDecember 12, 2014
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