9-14-09 - Economics 448 Class Notes 9/14/09 Akerlof...

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Economics 448 – Class Notes – 9/14/09 Akerlof Article: * Interesting: He was responding to this idea that markets carry this tremendous amount of information inside of them, and if we are lacking in knowledge of the quality of a product, then the price mechanism will explain all the relevant information. All the information relevant is contained within the price AKERLOF DISAGREED WITH THIS IDEA When information is asymmetric – when the parties have different information, there is asymmetric information problem Akerlof claims that markets will fail in this situation When the seller has better information or when the buyer has better information EXAMPLE: Peaches Lemons Ratio Quality Buyer Seller (1/3) Peach 3000 2500 (2/3) Lemon 2000 1000 Buyer’s expected valuation of the car: $2333.33 There is no price range at which the seller is willing to sell, that signals to the buyer that a peach might in the mix. If seller says I am willing to sell a car to you for $2600, what is the buyer going to say? o Buyer knows the car could be a peach OR it could be a lemon, so the buyer is not willing to buy a car of unknown value for $2600. Buyer is only willing to pay $2333.33 for a car of unknown value If the vehicle is being sold for $2100, that is a clear signal that the vehicle is a lemon since the price is less than the selling range for a peach but greater than the buyer’s valuation for a peach. o
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This note was uploaded on 01/07/2010 for the course ECON 448 taught by Professor Nonnenmacher during the Fall '07 term at Allegheny.

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9-14-09 - Economics 448 Class Notes 9/14/09 Akerlof...

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