Asked by Maegan Neuman on Apr 28, 2024
Verified
A seller decides to sell an object by means of a sealed-bid, second-price auction without a reservation price.There are two bidders.The seller believes that for each of the two bidders there is a probability of 1/2 that the bidder's value for the object is $600 and a probability of 1/2 that the bidder's value is $300.The seller believes that these probabilities are independent between bidders.If the bidders bid rationally, what is the seller's expected revenue from the auction?
A) $360
B) $450
C) $375
D) $600
E) $420
Sealed-Bid
A bidding process where all bidders simultaneously submit their bids in sealed envelopes, and the bids are not revealed until all bids have been submitted.
Second-Price Auction
An auction format in which the highest bidder wins the item, but the price paid is the second-highest bid.
- Acknowledge the forecasted financial results for sellers stemming from the design of the auction and bidders' value estimations.
- Understand the strategic consequences of Vickrey auctions for both bidders and sellers.
Verified Answer
ZK
Zybrea KnightMay 04, 2024
Final Answer :
C
Explanation :
In a sealed-bid, second-price auction, the highest bidder wins the object but only pays the second-highest bid. Therefore, bidders have an incentive to bid their true value for the object.
For each bidder, there is a 1/2 chance their value is $600 and a 1/2 chance their value is $300. The expected value of their bid is then:
(1/2)($600) + (1/2)($300) = $450
Therefore, the expected revenue for the seller is the sum of both expected bids, which is:
$450 + $450 = $900
However, since this is a second-price auction, the seller will only receive the second-highest bid. So, the expected revenue for the seller is actually:
(1/2)($600) + (1/2)($300) = $375
Thus, the correct answer is C) $375.
For each bidder, there is a 1/2 chance their value is $600 and a 1/2 chance their value is $300. The expected value of their bid is then:
(1/2)($600) + (1/2)($300) = $450
Therefore, the expected revenue for the seller is the sum of both expected bids, which is:
$450 + $450 = $900
However, since this is a second-price auction, the seller will only receive the second-highest bid. So, the expected revenue for the seller is actually:
(1/2)($600) + (1/2)($300) = $375
Thus, the correct answer is C) $375.
Learning Objectives
- Acknowledge the forecasted financial results for sellers stemming from the design of the auction and bidders' value estimations.
- Understand the strategic consequences of Vickrey auctions for both bidders and sellers.
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