In a second-price auction, if Advertiser A bids $2.00 and Advertiser B bids $1.00, what is the cost of the winning bid?

In a second-price auction, the winner is the bidder with the highest bid, but they only pay the price of the second-highest bid. In this scenario, Advertiser A bids $2.00 and Advertiser B bids $1.00. Since Advertiser A has the highest bid, they win the auction. However, according to the rules of a second-price auction, Advertiser A will pay the amount of Advertiser B's bid, which is $1.00, plus a minimal increment.

Typically, this increment is a small amount over the second-highest bid, making the cost of the winning bid $1.01. This system encourages honest bidding, as bidders can bid their true maximum without fear of overpaying. Therefore, the correct answer reflects the nature of second-price auctions, where the winning bidder pays just above the second-highest bid to maintain a competitive edge while not exceeding their own bid unnecessarily.