You inherited a house in San Diego from a rich uncle. You need money now, so you are considering three options:

* option A: sell the house for $250,000

* option B: spend $75,000 on improving the house, after that sell it for $320,000.

* option C: burn the house for insurance money. The house is insured for $209,000.

Not selling the house is not a viable option.

If you sell the house (options A and B), you will have to pay realtor’s fees and taxes, which amount to 7% of the selling price. (For example, if you sold the house for $100,000, the total cost of fees and taxes will be $100,000*0.07=$7,000).

If you burn the house, you’ll have to hire a good lawyer to prove it was an accident. The lawyer will cost you $20,000 (you do not have to pay realtor’s fees and taxes in this case).

*Required:*

a) What is the value of each option?

A= B= C=

b) Which option should you choose?

*(enter 1 for A, 2 for B, 3 for C)*

c) What is the opportunity cost of options A and B?

A= B=

d) Suppose you bought the house for $500,000 in 2007, instead of getting it from a rich uncle for free (the rest of the numbers do not change). Should you choose option A, B or C in this case?

*(enter 1 for A, 2 for B, 3 for C)*

e) If you got different answers in (b) and (d), explain why they are different. If you got the same answers in (b) and (d), explain why they should be the same.