Final answer:
A "lemon" refers to a used car of low quality, highlighting the issue of imperfect information where the seller knows more about the product's quality than the buyer. The buyer may become hesitant to purchase due to the risk of acquiring a defective car.
Step-by-step explanation:
When economists and used-car dealers refer to a "lemon", they are talking about a car of low quality that may reveal its defects only after it has been purchased. This term is widely used to describe a situation where there is imperfect information between the buyer and the seller. The seller typically knows much more about the quality of the car than the buyer, leading to a potential information asymmetry. The fear of buying a lemon results in buyers being very cautious and hesitant to make a purchase, as they may end up with a defective product.
Consider Marvin who is looking to buy a used car. Despite doing his research and even having the car inspected by a mechanic, he still faces the risk of purchasing a lemon simply because he cannot be as certain about the car's condition as the seller is. This common concern among car buyers showcases the challenges of purchasing used goods in the presence of imperfect information.