Assume there are two types of firms in the market Type A and Type B. Type A are new firms with high growth potential but no previous market presence. Type B are incumbent firms which have had a presence in financial markets for the past 20 years but have low growth prospects. Type A ascertains that the value of their initial stock offering should be $50 per share and Type B has stock already trading in secondary markets at a price of $10 per share. As a novice investor, you have no other information about these firms except that type A make up 30 percent of the market and type B make up the remaining 70%.

1. At what price would you be willing to buy the stock of each firm?

2. Is this the equilibrium price? Explain why or why not?

3. What type of asymmetric information problem does this example illustrate?

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