Economics Questions

Re: Marginal utillity puzzle

abskebabs — Sun, 18 Nov 2012 18:01:32 GMT

If so, I don't think this is necessarily complete. We know how much revenue the firm receives, but not how much profit. If it receives negligible profit from both a and b, then the assignment of factors of production as described by me above would not happen. Instead, c would be getting produced by C and either a or b by A. Gaining B, at that point, would depend on the profit the firm makes off of a or b, of which we know nothing.

Hmmm, well the costs for A and C are necessarily sunk at the time of the decision and wouldn't factor into the decision unless they could produce other goods or can be sold to another producer for a higher price than the expected product price, neither of which were explicitly accounted for in this example (if they were, then yes the profit/loss decision to make the products producible with would have to balance the revenue from their sale against the highest of these opportunity costs).

The main point however is that the marginal revenue actually gained from buying B is £1 and hence it definitely would not be worth paying more than a £1 and likely would be less by an epsilon (£1-e) naturally affected by the interest rate(s) and rates of return from other possible avenues of investment. This would determine the profit margin required to make this better than other modes of investment for the capitalist. Whether a seller would actually be willing to sell B for less than a £1 is of course a fair question, and would depend on their production and trading possibillities, i.e. whether they have access to the requisite factory equipment or a trading partner who might conceivably bid say up to £6 for the factor B.

Re: Marginal utillity puzzle

Wheylous — Sun, 18 Nov 2012 02:43:48 GMT

Can someone explain the answer to me?

The way I can explain it is that as is (without B), the producer could make product b with A and product a with C (these yield the highest revenue). Hence, the benefit of attaining B is to be able to produce b with it and free up A to make a and C to make c. Hence, the only benefit of an added B is one more c (due to the reallocation of production goods).

Is this correct?

If so, I don't think this is necessarily complete. We know how much revenue the firm receives, but not how much profit. If it receives negligible profit from both a and b, then the assignment of factors of production as described by me above would not happen. Instead, c would be getting produced by C and either a or b by A. Gaining B, at that point, would depend on the profit the firm makes off of a or b, of which we know nothing.

Furthermore, capital goods are a fixed cost, not a per-product cost. At least according to basic neoclassical theory, fixed costs do not matter in the long run - only marginal costs determine the quantity produced.

Re: Marginal utillity puzzle

abskebabs — Sat, 17 Nov 2012 20:52:50 GMT

I am not aware of any Austrian treatment of problems with even limited uncertainty (when the kinds of possible events and their probabilities are known). Maybe I should read something by the brother of LvM... Quote

Yes I'm not aware of any explicit treatments either. What I do find interesting with the above type of problem however, is that I was able to generalise a prior version I asked on this forum using a simple decision theoretic approach and this provides an intriguing connection since such approaches are also used to deal with stochastic or nonstochastic uncertainty in a non-probabillistic manner.

I guess very primitively, you could say if the probabillity of A breaking down in producing B is 0.5, and thus assign expected value to work out B's valuation, but doing so of course makes brave assumptions regarding the actor's risk preferences as is also well known in Neoclassical economics.

Re: Marginal utillity puzzle

Andris Birkmanis — Sat, 17 Nov 2012 20:40:25 GMT

Of course, the permutations are endless!

It's not a permutation, it's a fundamentally different dimension. Jokes aside, I am not aware of any Austrian treatment of problems with even limited uncertainty (when the kinds of possible events and their probabilities are known). Maybe I should read something by the brother of LvM...

Re: Marginal utillity puzzle

Malachi — Sat, 17 Nov 2012 20:35:06 GMT

You should do that. A book of Austrian puzzles

Re: Marginal utillity puzzle

abskebabs — Sat, 17 Nov 2012 20:30:02 GMT

The problem with real life is - it is never certain.

And if there is even the slightest chance of, say, A breaking down before producing b, then the valuation of B will change. Dare to upgrade the puzzle? ;)

Of course, the permutations are endless! It's funny, I'm beginning to think it might be a good idea to make a book of praxeological puzzles, that I think would be also a good way to teach the subject too. It might emulate what this author, an old professor of mine, achieved for mathematics

Re: Marginal utillity puzzle

Andris Birkmanis — Sat, 17 Nov 2012 20:24:25 GMT

The problem with real life is - it is never certain.

And if there is even the slightest chance of, say, A breaking down before producing b, then the valuation of B will change. Dare to upgrade the puzzle? ;)

Re: Marginal utillity puzzle

abskebabs — Sat, 17 Nov 2012 20:21:58 GMT

Interesting, you guys have exceeded my expectations. Or perhaps this puzzle really was pretty trivial. :P

Like with the Law of Costs, I think the above example shows how you can find distinctive results with the Austrian approach to this subject that can't be found using a Neoclassical approach.

Feel free to explain your answers. (Interestingly the same reservation value would have been realised for product b if it was being sold instead of factor B. This makes a nice connection between the value/price relations between substitue means and ends. Maybe I should have asked the question that way to make the puzzle slightly more challenging. :P

Re: Marginal utillity puzzle

Andris Birkmanis — Sat, 17 Nov 2012 20:14:15 GMT

£1?

Not quite. More like 1 - epsilon :)

Re: Marginal utillity puzzle

abskebabs — Sat, 17 Nov 2012 20:13:11 GMT

and only read this one:

abskebabs:
Let's say there are 3 means/production goods A,B and C owned by the operator of a business.

The way I read it initially it wasn't much of a puzzle at all :P In light of the new (to me) information I'll need more time to think about it.

Ah, that's embarassing, sorry about that. No wonder there was confusion. I've modified that sentence now to remove the confusion.

Re: Marginal utillity puzzle

Fool on the Hill — Sat, 17 Nov 2012 20:11:56 GMT

£1?

Re: Marginal utillity puzzle

Zlatko — Sat, 17 Nov 2012 20:08:56 GMT

Ooooh, alright, I seem to have jumped over this sentence:

abskebabs:
In the beginning the firm has one of means A and one of means C.

and only read this one:

abskebabs:
Let's say there are 3 means/production goods A,B and C owned by the operator of a business.

The way I read it initially it wasn't much of a puzzle at all :P In light of the new (to me) information I'll need more time to think about it.

Re: Marginal utillity puzzle

Andris Birkmanis — Sat, 17 Nov 2012 20:06:41 GMT

Can they sell only one of each?

Probably yes, otherwise the solution is trivial (and not related to marginal anything).

Re: Marginal utillity puzzle

abskebabs — Sat, 17 Nov 2012 20:04:03 GMT

Zlatko:

Can they sell only one of each?

Yes, in fact it is only possible for the firm to be able to sell one of each since they can onl possibly get their hands on one of each factor in this puzzle by construction, since they have one of A and one C and can get one of B from the seller. I made the puzzle this way for simplicity, once you allow for diminshing marginal revenue productivity other complications extraneous to what I wanted to expose with the above example result. We must learn to walk before we run I guess. :P

Re: Marginal utillity puzzle

Zlatko — Sat, 17 Nov 2012 19:59:19 GMT

abskebabs:

The firm expects to be able to sell one of good a for £3, one of good b for £6 and one of good c for £1.

Can they sell only one of each?