Question

Catherine buys and sells real estate. Two weeks ago, she paid $300,000 for a house, intending to spend $50,000 on repairs and then sell the house for $400,000. Last week, the city government announced a plan to build a new landfill just down the street from the house Catherine purchased. As a result of the city’s announced plan, Catherine is weighing two alternatives: She can go ahead with the $50,000 in repairs and then sell the house for $290,000, or She just sell the house as it is for $250,000. Analyze the marginal cost and/or benefit of each alternative, then give advice for Catherine

Answer 1

Step-by-step explanation:Catherine is faced with two alternatives regarding the house she purchased:

1. Option 1: Proceed with the $50,000 in repairs and then sell the house for $290,000.

2. Option 2: Sell the house as it is for $250,000.

To analyze the marginal cost and/or benefit of each alternative, we need to consider the additional cost and the potential gain from each option.

Option 1: Proceed with the repairs and sell the house for $290,000.

- Marginal Cost: The additional cost would be the $50,000 in repairs.

- Marginal Benefit: Catherine would potentially gain an additional $40,000 ($290,000 - $250,000) compared to selling the house as it is.

Option 2: Sell the house as it is for $250,000.

- Marginal Cost: There would be no additional cost since no repairs are required.

- Marginal Benefit: Catherine would receive $250,000 from the sale.

Based on the analysis, the marginal benefit of Option 1 is $40,000, while the marginal benefit of Option 2 is $250,000.

Considering the potential gain, it would be more beneficial for Catherine to proceed with the repairs and sell the house for $290,000 (Option 1). This option offers a higher marginal benefit of $40,000 compared to selling the house as it is.

However, it is important for Catherine to also consider other factors, such as the time and effort required for the repairs, market conditions, and potential risks associated with the city's plan to build a new landfill nearby. These factors could impact the overall profitability and desirability of the house.

Therefore, my advice for Catherine would be to carefully evaluate these factors and assess the potential risks before making a final decision. It may also be beneficial for her to consult with professionals, such as real estate agents or contractors, to get a better understanding of the market conditions and the impact of the city's plan on the property value.