Question

A dealer decides to sell an antique card by means of an English auction with a reservation price of $200. There are two bidders. The dealer believes that there are only two possible values, $200 and $600, that each bidder’s willingness to pay might take. Each bidder has a probability of 1/2 of having each of these willingness to pay, and the probabilities for each of the three bidders are independent of the others' valuations. Assuming that the three bidders bid rationally and do not collude, the dealer's expected revenue from selling the card is approximately ____.

Answer 1

Expected revenue = $400

Explanation:

Expected revenue is given by the formula;

Expected revenue = Sum of x * p(x)

x = 200

x = 600

p(x) = 1/2

p(x) = 1/2

Substituting, we have;

Expected revenue = 200*1/2 + 600*1/2

= 100 + 300

= $400

Therefore, expected revenue = $400