Question

Intrinsic value is equal to market value when markets are:

a. in equilibrium.
b. in the money.
c. efficient.
d. at the margin

Answer 1

Intrinsic value and market value are equal when markets are in equilibrium, a state where supply and demand balance out and prices accurately reflect the true worth of assets, exemplifying both allocative and productive efficiency.

Step-by-step explanation:

The question pertains to when the intrinsic value of an asset is equal to its market value. We can understand this balance by examining the concept of market equilibrium. The term 'equilibrium' denotes a state of balance. In the context of financial markets, if a market is at its equilibrium price and quantity, supply and demand are perfectly matched and the price of an asset should reflect its intrinsic value accurately.

A market in equilibrium has no incentive to move away from this balance, as the supply and demand forces are equalized. This condition occurs in an efficient market, where all available information is already reflected in stock prices, meaning that the market value is a true representation of the intrinsic value of stocks.

Therefore, the correct answer to the question is: intrinsic value is equal to market value when markets are 'a. in equilibrium.' This is because it is at this point that the price set for a commodity or stock is equal to the marginal cost, reflecting both allocative and productive efficiency, characteristic of a perfectly competitive market.

Answer 2

The intrinsic value is equal to the market value when markets are in equilibrium, which means a balance is achieved between demand and supply. This occurs in a perfectly competitive market where allocative and productive efficiencies are met, and no economic pressure exists to change the price or quantity of goods. Option A is the correct answer.

Step-by-step explanation:

Intrinsic Value and Market Value

The question at hand asks about the condition under which the intrinsic value of an asset is equal to its market value. The intrinsic value is the perceived or calculated true value of an asset based on fundamental analysis, while the market value is the price at which the asset currently trades in the market.

In the context of market conditions, intrinsic value and market value are equal when markets are in equilibrium. This state of equilibrium occurs when the market price is such that the quantity demanded by consumers equals the quantity supplied by producers, meaning that there are no leftover goods or excess demand in the market. At this point, price reflects both the marginal cost of producing an item and the maximum price consumers are willing to pay for it, balancing out demand and supply.

Perfect competition scenarios, which in theory might not exist in reality, showcase this balance best. They assume that, in the long run, markets will reach a state of equilibrium where allocative and productive efficiencies are achieved. Allocative efficiency occurs when the price and quantity of the product in the market reflect consumer preferences in such a way that no additional utility can be gained without a loss occurring somewhere else, while productive efficiency occurs when goods are produced at the lowest possible cost.

Thus, when a market is at equilibrium, the forces of supply and demand are in balance, and no economic pressure exists to change the price or quantity of goods being produced and consumed. Hence, the market is efficient because the allocation of resources is optimized to the benefit of both consumers and producers, matching the intrinsic value to the market price.

Therefore, the correct answer to the question "Intrinsic value is equal to market value when markets are:" is a. in equilibrium.