A number of companies exist that specialize in "payday loans." Payday loans are small loans often for a few hundred dollars or less that are made to low-income borrowers. Often these borrowers have poor credit histories and few assets and would have difficulty in qualifying for loans from other sources. The interest rates on these loans are often very high and some commentators have suggested that ceilings should be enforced on these loans.

a. Try to apply the lemon's problem to the market of payday loans and explain what causes the high interest rates in this market.

b.If such interest rate ceilings were imposed, what would be the likely effect?