A reserve price is a minimum price set by the auctioneer. If no bidder is willing to pay the reserve price, the item is unsold at a profit of $0 for the auctioneer. If only one bidder values the item at or above the reserve price, that bidder pays the reserve price. An auctioneer faces two bidders, each with a value of either $25 or $90, with both values equally probable. What reserve price should the auctioneer set, and what is the expected revenue from auctioning the item with and without a reserve price?
Now suppose that each bidder has a value of either $75 or $90. What reserve price should the auctioneer set, and what is the expected revenue from auctioning the item with and without a reserve?