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. If some of the owners of houses with solid foundations remove their houses from the market because they can't sell their house for a price that is as high as the value of their house, then:
A)buyers' reservation prices will rise.
B)the owners of houses with a cracked foundation will also take their houses off the market.
C)the proportion of homes for sale with a cracked foundation will rise.
D)the average sales price of a house will rise.

Question

Quizplus · Accepted Answer

As owners of houses with a solid foundation remove their houses from the market, a larger proportion of houses on the market will have a cracked foundation.

Suppose That There Are Two Types of Houses for Sale