[negligible91]

In lecture 5, you state that an actor economizes in his consumer goods by allocating across goods such that no value differences remain: the MUs of different consumer goods in additional uses are roughly the same, so there is no advantage in switching from one good to another. Could you explain this statement for the following example? If I have 4 units of good A, 3 units of B, 7 units of C, and 8 units of D, and this is my optimal configuration, what exactly does the statement mean? Does it mean the marginal utility of addition of good D (the satisfaction a 9th unit of good D would have, given that there are currently 8 units) is equivalent to the marginal utility of subtraction from goods C, B, and A (the respective satisfactions that the 4th unit of A, 3rd unit of B, and 7th unit of C currently have)? Or does it mean the marginal utility of subtraction of D (in other words, the least currently valued satisfaction that a unit of D is being used for), is equivalent to the marginal utility of subtraction of the other goods as well? And what is the reason for the qualifier “roughly” equal?

Thank you,
Bharat

[jmherbener]

It would mean that the MU of the 4th unit of A, the 3rd unit of B, 7th unit of C, and 8th unit of D are roughly the same. In other words these units are ranked close together on his preference rank. Close enough together that he does not choose a different configuration.

Pref. Rank
.
.
.
4th unit of A
3rd unit of B
7th unit of C
8th unit of D
5th unit of A

With the preference rank above, he is unwilling to give up the end attain with the 8th unit of D to get the end attain with the 5th unit of A.

[michael.f.burian]

Professor Herbener, I’m afraid your answer made me a bit confused. When will an actor ever be in a state that compels him to give up the 8th unit of D in order to get a 5th unit of A? If he ranks his ends and chooses accordingly then he will always be satisfied with choosing D over A (ex ante, and given the current configuration of his values and his supply), since the 8th unit of D is higher on his scale of preference than the 5th unit of A? If the differences between the MU were substantial he would still choose in the same way, wouldn’t he? The differences between the MU of the goods seem irrelevant. What am I missing?

[jmherbener]

Don’t let the tail of formal analysis wag the dog of human action. MU analysis is used to explain human action, it has no other meaning. Sometimes a person trades one good for another, sometimes he does not do so. In the former case he ranks the first good higher than the second and in the latter case he ranks the second good below the first. If he has only one unit of each good, then a sizable gap might exist between the value of the the two units. If we stipulate that the goods remain scarce to him and yet are available to him in multiple units, each of which can be used to attain a different end, then he can trade between actions with units of the first and actions with units of the second good in a way that narrows the value gap between the last unit of the first and the last unit of the second good. Even if the goods were indefinitely divisible, however, the value difference (while shrinking to a minimum) would not disappear entirely because to reach his preferred outcome he must choose to give up action with the last unit of one good to obtain action with the last unit of the other good. At that point, he could not reallocate the units of the different goods further without reducing his overall satisfaction.

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