Two Types of Existing Houses Are for Sale: Ones with a Cracked

question 99

Multiple Choice

Two types of existing houses are for sale: ones with a cracked foundation and ones without.In all other respects,they are identical.Houses without cracked foundations are worth $200,000;those with cracked foundations are worth $200,000 minus the $20,000 to fix the crack,or $180,000.The frequency of solid foundations is 80%.Sellers know which type of house they have,but buyers cannot detect a crack.No seller must sell his house in order to move,and thus no one accepts anything less than the value of their house.
-Refer to the information above.Owners of houses with solid foundations will find that

• A) buyers are offering more than $200,000.
• B) buyers are offering exactly $200,000.
• C) buyers are offering exactly $180,000.
• D) it is not worth it to sell their house.
• E) some buyers offer $200,000 and some offer $180,000.

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Definitions:

Bond Discount

The variance in price between the face value of a bond and the amount it fetches on the market, specifically when sold at a price less than the face value.

Straight-Line Method

A method of calculating depreciation by evenly spreading the cost of an asset over its useful life.

Semiannual Interest

Refers to the payment of interest on a loan or financial instrument every six months.

Bond Premium

The excess value of a bond above its face value in the marketplace.