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

question 97

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.As some of the owners with solid foundations remove their homes from the market because they cannot get their price,

• A) the buyers' reservation price rises.
• B) the owners of houses with cracked foundations also begin to remove their homes from the market.
• C) the proportion of houses for sale with a cracked foundation rises.
• D) the buyers become more willing to believe the owners' claim of a solid foundation.
• E) the buyers' reservation price is unchanged.

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Definitions:

Factor Distribution

Refers to the way in which income is distributed among the factors of production, typically labor, capital, and land.

Human Capital

The combined abilities, expertise, or other non-physical assets belonging to people that can be leveraged to generate economic worth.

Proprietor's Income

The income earned by the owner of a sole proprietorship, which consists of the profits generated by the business.

Production Factor

An input used in the manufacturing of goods or services, typically categorized into land, labor, and capital.