The lemons problem may cause markets with asymmetric information
A) to reduce the number of low-quality goods.
B) to reduce the number of high-quality goods.
C) to increase the number of high-quality goods.
D) to increase the average quality of goods.

Question

Quizplus · Accepted Answer

The lemons problem, as described by George Akerlof, suggests that in markets with asymmetric information, where sellers have more information about the quality of goods than buyers, there tends to be a reduction in the number of high-quality goods. This is because buyers, unable to distinguish between high and low-quality goods, are only willing to pay a price that reflects the average quality. This, in turn, drives out the high-quality goods, leaving a market dominated by "lemons," or low-quality goods.

The Lemons Problem May Cause Markets with Asymmetric Information