First Fiddler's Bank Has Foreclosed on a Home Mortgage and Is

question 22

Multiple Choice

First Fiddler's Bank has foreclosed on a home mortgage and is selling the house at auction. There are three bidders for the house, Jesse, Shelia, and Elsie. First Fiddler's does not know the willingness to pay of any of these bidders but on the basis of its previous experience believes that each of them has a probability of of valuing the house at $900,000, a probability of of valuing it at $700,000, and a probability of of valuing it at $400,000. First Fiddler's believes that these probabilities are independent between buyers. If First Fiddler's sells the house by means of a second-bidder, sealed-bid auction (Vickrey auction) , what will be the bank's expected revenue from the sale? (Choose the closest answer.)

• A) $800,000
• B) $700,000
• C) $666,666.67
• D) $550,000
• E) $533,333.33

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Definitions:

Collateral

Assets pledged by a borrower to secure a loan or credit, which can be seized by the lender if the borrower fails to repay the loan.

Inadequate

Lacking the quality or quantity required; insufficient for a purpose.

Assets

Economic resources owned or controlled by an individual or entity, expected to produce future benefits.

Default

The failure to fulfill a financial obligation, such as not making the required payments on a loan.