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.
If potential buyers offer their reservation price,owners of houses with solid foundations will find that

Question

Quizplus · Accepted Answer

Since buyers cannot distinguish between houses with and without cracked foundations, they will offer a price that reflects the average expected value. Given the 80% frequency of solid foundations, the expected value is $200,000 * 0.8 + $180,000 * 0.2 = $196,000. This is less than $200,000, so owners of houses with solid foundations will not find it worth selling at this price.

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