Consider the following simple model of a common values auction. Two buyers each obtain a private signal about the value of an object. The signal can be either high (H) or low (L) with equal probability. If both obtain signal H, the object is worth 1; otherwise, it is worth 0.
a. What is the expected value of the object to a buyer who sees signal L? To a buyer who sees signal H?
b. Suppose buyers bid their expected value computed in part (a). Show that they earn negative profit conditional on observing signal H-an example of the winner's curse.