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

question 61

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 while 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 its value.
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.

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