The Market for Lemons Case Study Example | Topics and Well Written Essays - 1750 words

The Market for Lemons - Case Study ExampleAkerlof then says that, although his theory has these very(prenominal) general applications, he will focus on the foodstuff for used cars The automobile market is used as a finger exercise to exemplify and develop these thoughts. It should be emphasized that this market is chosen for its concreteness and ease in understanding rather than for its importance or true(a)ism (Akerlof, George, 1970)On first reading, it is tantalising to interpret the automobile market as the market in which real people buy and sell real cars and to think that Akerlof is going to present or so kind of case- mull. One can see why he might focus on one particular market which is easy to understand, even if that market is not very important on the scale of the economy as a whole. But then what does Akerlof mean when he says that this market is not life wish well The object of a case-study may be unrepresentative, but it cannot be unrealistic. To make sense of th is passage, we have to recognize that it marks a transition between the real world and the world of models. Akerlof is using the real automobile market as an example. But what he is going to present is not an empirical case study it is a model of the automobile market. Although it is the real market which may be unimportant, it is the model which may be unrealistic. Akerlof moves straight on to the central ingredient of his paper, section II, entitled The Model with Automobiles as an Example. The transition from reality to model is made again at the very beginning of this section The example of used cars captures the upshot of the problem. From time to time one hears either mention of or surprise at the large price difference between new cars and those which have sound left the showroom. The usual lunch table justification for this phenomenon is the pure joy of owning a new car. We offer a different explanation. Suppose (for the sake of lucidness rather than realism) that there are just quadruple kinds of cars. There are new cars and used cars. There are good cars and bad cars. (Akerlof, George, 1970)The first four sentences are about an observed property of the real world there is a large price difference between new cars and almost-new ones. Akerlof suggests that, at least(prenominal) from the viewpoint of the lunch table, this observation is difficult to explain. If we assume that Akerlof takes lunch with other economists, the implication is that economics cannot easily explain it the pure joy hypothesis sounds like an ad hoc stratagem to rescue conventional price theory.