Question

As shown in Exhibit \(7,\) at the socially efficient number of flights, what will be the market value of Orville's house? a. \(\$ 100,000\) b. \(\$ 95,000\) c. \(\$ 90,000\) d. \(\$ 85,000\) e. \(\$ 80,000\)

Short answer

The market value of Orville's house at the socially efficient number of flights is \(\$95,000\).

Step-by-step solution

Find the decrease in value due to socially efficient number of flights

First, we need to calculate how much the market value of the house will decrease due to the socially efficient number of flights. According to our assumption, the market value decreases by $1,000 for each flight. Given that there are 5 socially efficient flights, the total decrease in the market value is: Decrease in value = 5 flights * \(1,000 per flight = \)5,000

Calculate the market value of Orville's house at the socially efficient number of flights

We know the initial market value of Orville's house is $100,000. To find the market value at the socially efficient number of flights, subtract the decrease in value from the initial market value: Market value at socially efficient number of flights = Initial market value - Decrease in value = \(\$100,000 - \$5,000 = \$95,000\) So, the market value of Orville's house at the socially efficient number of flights is \(\boxed{\$95,000}.\) The correct option is (b).

Key concepts

Market Value

The term "market value" refers to the amount for which an asset would trade in a competitive auction setting. In simpler terms, it's the price that a buyer is willing to pay and a seller is willing to accept.

• It is heavily influenced by supply and demand dynamics.
• The market value of a property can be impacted by external factors such as location changes, economic conditions, and regulatory changes.

For real estate, like Orville's house, market value changes based on perceived and actual advantages or disadvantages associated with it.
For instance, having a home in a bustling area might increase its market value due to convenience, but excessive noise from nearby flights can decrease it.

Decrease in Value

Obtaining a clear understanding of how and why a property's value decreases is crucial. External factors can lead to a depreciation in market value, which is an important concept for homeowners and buyers.

• In Orville's case, the introduction of flights near his home has decreased its desirability. Each flight impacts the expected peaceful environment, lowering the home's appeal.
• A formula can express this decline: Decrease in value = Number of Flights × Decline per Flight.

For Orville’s house, this decrease is quantified as $1,000 per flight. With 5 flights approaching, the total decrease accumulates to $5,000.
Thus, recognizing these influences allows for better financial planning and understanding of real estate fluctuations.

Initial Market Value

Before any factors causing appreciation or depreciation, a property has an initial market value. It's the starting point of valuation.

• Represents the expected worth of a property under normal conditions without disruptive changes.
• Acts as a benchmark for evaluating fluctuations due to external factors.

In Orville's scenario, the initial market value is set at $100,000.
This figure helps in calculating impacts like the decrease in value we discussed earlier. Use initial market value to assess whether a property is performing well or encountering challenges. Thus, it is a critical figure for making investment decisions and gauging economic impacts.