Suppose That There Are Two Types of Houses for Sale

question 24

Multiple Choice

Suppose that there are two types of houses for sale: those with solid foundations and those with cracked foundations. In all other respects, the two types of houses are identical. Houses with solid foundations are worth $200,000, while those with cracked foundations are worth $200,000 minus the $20,000 to fix the crack, or $180,000. Sellers know which type of house they have, but buyers cannot detect whether the foundation has a crack. Suppose that 80 percent of the houses for sale have a solid foundation and 20 percent of the houses for sale have a cracked foundation. In the long run, we would expect:

• A)80 percent of the houses for sale to have a solid foundation, 20 percent to have a cracked foundation, and houses to sell for $196,000.
• B)100 percent of the houses for sale to have a cracked foundation and to sell for $180,000.
• C)100 percent of the houses for sale to have a solid foundation and to sell for $200,000.
• D)100 percent of the houses for sale to have a cracked foundation and to sell for more than $180,000.

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Definitions:

Diseconomies of Scale

An increase in production costs as the scale of production goes up, leading to reduced efficiency.

Fixed Inputs

Resources or factors of production, such as land or capital, that remain constant regardless of the level of output or production.

Variable Inputs

Resources or inputs whose quantity can be changed in the short term to adjust the level of production.

Long-run Average Total Cost

A curve that shows the lowest average cost at which a firm can produce any given level of output in the long run, when all inputs are variable.