Select 12 Paragraph Styles Editing [3] Explain how the following problem (EXAMPLE 16.8) can be explained by "adverse selection," more specifically "lemon principle." (7 points) Lemon principle - "When a seller has private information about the value of a good, buyers will discount the price they are willing to pay due to adverse selection." Adverse Selection in Equity Markets Problem Zycor stock is worth either $100 per share, $80 per share, or $60 per share. Investors believe each case is equally likely, and the current share price is equal to the average value of $80. Suppose the CEO of Zycor announces he will sell most of his holdings of the stock to diver- sify. Diversifying is worth 10% of the share price--that is, the CEO would be willing to receive 10% less than the shares are worth to achieve the benefits of diversification. If investors believe the CEO knows the true value, how will the share price change if he tries to sell? Will the CEO sell at the new share price? D Focus