Question

1. Problem 16-15 (Algorithmic)

   Strassel Investors buys real estate, develops it, and resells it for a profit. A new property is available, and Bud Strassel, the president and owner of Strassel Investors, believes if he purchases and develops this property it can then be sold for $160,000. The current property owner has 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.

   1. 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? Round your answer to 1 decimal place. Enter your answer as a percent.
      
      %
      
   2. How much does Strassel need to bid to be assured of obtaining the property?
      
      $  
      
      What is the profit associated with this bid?
      
      $  
      
   3. 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 bid of   results in the largest mean profit of $  .

Answer 1

The bid by each competitor is uniformly distributed between and .

Strassel must beat the maximum of the two bids.

We count the number of times out of 500, that the bid is better than the maximum bid by competitors.

Then we compute the frequency of outbidding competitors

Now we compare that probability of   for a bid with probability for and bids.

We see that it is better to compute both probabilities on a single simulation.

Now computing expected profit for each bid,

profit

profit

profit

Hence recommended bid is .