Question

Please read the following article:

Akerlof, G. A. The market for “lemons”: Quality uncertainty and the market mechanism. The Quarterly Journal of Economics. 1970.

Question A

1. Please summarize the article of "the Market for lemon",

2.Discuss how accounting plays a role to create a "healthy" capital market.

3. What are the information asymmetry and adverse selection in the article?

Question B

Read PVModel.pdf

1. After reading the "PV model under certainty", please complete the second-year B/S and I/S of the firm on the article.

Answer 1

I am not able to find the exact PVModel which is being referred here .If you attach the model I can answer the following question.

The answer to the following questions

1.It examines thequality of goods traded in a market can degrade in presence of information between the buyers and sellers leaving only the lemon behind.A lemon to be precise is defined is a a car that is found to be defective only after it have been bought.

Buyers cannot distinguish between a high quality car and a lemon.They only pay a fixed price for a car that have the average value of a peach and lemon.On the other hand the sellers have an idea whether they hold a peach and a lemon.Given the fixed price which buyers will pay and the sellers will sell only when they hold lemons and will leave the market when they hold peaches .However as the seller of peaches leave the market the willingness of the buyers to buy will decrease leading to even more sellers of high quality cars to leave the market with a postive feedback.

Akerlofs paper displays that how the prices can be determined by the quality of goods traded in the market.Low prices drive away sellers of high quality goods leaving only lemons .

2 & 3.The article of the market for lemon can be summarized by exploring three key points of the article .The Automobile Market ,Information asymmetry and adverse seletion.The article explains the market for lemons as a market where the seller of the car knows all the information about the car such as quality of the car,however the buyer is not aware of this information so they dont know if they are purchasing a good quality car or a lemon.Thus the buyer is not willing to pay as much for a car because of lack of information available to make a smart decision.