What bid amount is Land Shark considering for the upcoming auction?

• A. $1,229,000
• B. $1,200,000
• C. $1,329,000
• D. $1,150,000

Answer: (A)

When evaluating bids under uncertainty, you want the option that maximizes expected profit across many possible auction outcomes. A Monte Carlo approach models the distribution of other bidders, the asset’s value, and costs, then simulates numerous auctions for different bid levels. For each bid, it computes the average payoff (winning scenarios minus price paid, given the bid). The bid that yields the highest average payoff is the one Land Shark would consider.

The bid of 1,229,000 emerges as the value that, on average, gives Land Shark the best balance between winning the auction and not overpaying when winning. It’s high enough to win in many realistic competitive scenarios but not so high that the incremental gain from winning is outweighed by the extra amount paid. Other bid levels either miss too many auctions (lower expected profit due to losing more often) or pay too much when they win (lower expected profit due to inflated purchase price). So this specific amount is chosen because it maximizes the simulated expected net gain under the given assumptions.