Micro Economics Essay Example | Topics and Well Written Essays - 1000 words - 2

Micro Economics - Essay Example ducts as good ones, buyers would take the quality to be uncertain and accordingly base their decisions on the average quality of the products leading to a decline on the average willingness to pay. As a result the products which were actually of good quality would not receive their deserved prices and would thus be driven out of the market and the market would be filled up with the worse quality products or â€Å"lemons†. Akerlof demonstrated his point by using the example of the market of used cars. Suppose there are both good quality used cars as well as bad or defective ones, i.e, the lemons, on offer in the market and the consumer is not able to infer before hand which type is being offered to him by any particular seller. He therefore assumes it to be of average quality and is prepared to pay equal to the price of the average quality used cars. The owner of a good quality car therefore will not get the deserved high price for it as the customer has no way of knowing that it is in quality higher than the average. Therefore this good quality car shall be withdrawn from the market and so will be all other good quality cars, leading to a fall in the average quality of cars in the market. As a result of this downward revision of average quality, moderately good cars shall also fail to earn sufficiently high prices and will thus be withdrawn. Recurrence of this mechanism finally leads to a situation w here only lemons are on offer in the market. To assess the validity of this proposition Bond (1982) attempted to empirically test it. In particular, the paper attempted to test the proposition that good products are driven out by bad products in the market for used pickup trucks. The amount of maintenance required on a particular truck was taken to be the measure of quality with the â€Å"lemons† being identified as used trucks that require significantly greater maintenance compared to the average. If the Akerlof argument is valid, then in this set up the result should