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

question 73

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.The long-run equilibrium in the housing market is

• A) 80% homes with solid foundations,20% cracked foundations,and a reservation price of $180,000.
• B) 100% cracked foundation homes and a reservation price of $180,000.
• C) 100% solid foundation homes and a reservation price of $200,000.
• D) 100% cracked foundation homes and a reservation price between $200,000 and $180,000.
• E) indeterminate.

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Definitions:

Isocost Line

A graph representing all combinations of a firm's inputs that result in the same total cost.

Least Costly

A term referring to an option that incurs the lowest expenses in comparison to alternatives.

Isocost Line

A graph representing all combinations of the inputs' quantities that equal a certain cost.

Capital

Financial assets or the financial value of assets, such as cash and goods, used to generate wealth through investment.