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 $200.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)$600
B)$400
C)$300
D)$280
E)$360

Question

Quizplus · Accepted Answer

In a second-price auction, the winner pays the second-highest bid. Each bidder will bid their true value. The possible outcomes are: both bid $600, both bid $200, one bids $600 and the other $200. The expected revenue is the average of these outcomes: (1/4)*$600 + (1/4)*$200 + (1/2)*$200 = $300.

A Seller Decides to Sell an Object by Means of a Sealed-Bid