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

question 38

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.
Suppose that consumers are unsophisticated and assume that houses with cracked and solid foundations are offered for sale in their true proportion.The consumer's reservation price is thus

• A)$200,000.
• B)$196,000.
• C)$180,000.
• D)$160,000.