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The Market for Lemons - Essay Example

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The essay "The Market for "Lemons" describes there are several relevant application for the Akerlof Market for ‘Lemons’ model in showing that quality and uncertainty have a direct correlation within trading. A buyer buys a car not knowing that the car they are buying has a defect hence a seller is the one that benefits from this car sale transaction…
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The Market for Lemons
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The Market for Lemons

Download file to see previous pages... In this paper, Akerlof presented a research on the relationship between quality and uncertainty by using the example of wide market for used cars to draw relevance (Akerlof 488). As per the paper, Akerlof gives the description of a used car, which he gives as the exchange of ownership from a car buyer to a seller after the first owner has used it to a state that may attract wear and tear (489). Asker of intimates that ‘cherries’ and ‘lemons’ are two categories of used cars where by a car attracts these categories depending on the quality of the car and the previous owner’s driving technique. Frequencies of maintenance and vehicle accident history are the other factors that contribute towards a car becoming a ‘cherry’ or a ‘lemon’. With this, this essay will review the article by Akerlof George by giving the summary of the article then discussing the points that he intended to put across. As per this article, a buyer may end up buying a used product without having adequate information concerning the cars history or if it has any hidden defects. During car purchase, a buyer may not have the time to go through all the elements of the vehicle hence making a seller to take advantage of the situation. The implication of this is that the car buyer may not be certain on whether they are buying a ‘cherry’ or a ‘lemon’ as the buyer relies on the general quality of the vehicle and not quality in details. In the end, the average quality assessment that a buyer does influences them to buy it at their chosen value irrespective of whether the car has a good maintenance history or not. Therefore, a buyer or seller may be at a loss as the seller sells the car at a high price as the car deserves or the buyer buys the car at a low price. For this reason, car owners that are sure of the quality of their cars do not sell their cars in the used market for cars as this reduces the average car quality for the vehicles that they intend to sell. On the other hand, the reluctance by good quality used car owners reduces the value of other vehicles in the market hence translating to a reduction of product prices. 2. Asymmetrical information As indicated, quality used cars, tend to receive low value during their sale because of lemons and vice versa. This relatively the bad pushing out the good in a sequence whose dependency is two variables (490). p, is the first variable that denotes the price of the vehicle and the used cars quality presented for trade, or Qd = D (p, p), the supply of lemons and cherries together with their quality on average p will depend on the price (p = p) or (p) and S = S (p).  ...Download file to see next pagesRead More
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