More Indifference

Let's take a closer look at Table 8:

Looking again, we see another tie. Now we have a three-way tie. No wings and 30 fries, 1 wing and 15 fries, and 3 wings and no fries are all tied for 6th place. These three menus, together, form what preference theory calls an "indifference curve" -- a linking of all the combinations of goods and services that come up with the same ranking in a person's preference ranking.

This "indifference" conception helps us to relate the preference approach to the marginal-benefit approach. What is the marginal benefit of the first wing? We can get that by traveling along the indifference curve corresponding to sixth place. By definition, the marginal benefit is the money value of the other goods John would give up to get that wing. Since John is indifferent between no wings and 30 fries (on the one hand) and 1 wings and 15 fries (on the other hand) we can conclude that John would give up 15 fries to get that first wing -- no more and no less. So John's marginal benefit from one wing is the market value of 15 fries, that is, 45 cents. What is the marginal benefit of the second wing? We don't know, exactly, from this information. We would need to try more alternatives until we find one that ties in rank with 1 wing and 15 fries. But we can approximate, using the formula MB benefits/wings. Notice that John Doe would give up all 30 fries to get all 3 wings. So the total benefit of 3 wings is the market value of 30 fries, 90 cents. Moving from 1 wing and 15 fries to 3 wings and no fries, we have benefits of 90-45=45 cents and wings of 2, so MB 45/2 = 22.5 cents. We see that John Doe experiences diminishing marginal benefits of consuming wings -- just as we would think. Notice, we are still applying the good old "opportunity cost" concept. To say that John is indifferent between no wings and 30 fries (on the one hand) and 3 wings and no fries (on the other hand) is to say that 30 fries is an opportunity cost John is willing to give up to get 3 wings.

There is one thing we need to be cautious about. It turns out that the marginal benefit will be different if we start out from a different place. For example, suppose we started out with just 15 fries and no wings. We can see that John would NOT give 15 fries for that first wing -- that would reduce him from eighth place in his preference ranking to ninth. So the marginal benefit of the first wing will be somewhat less than the 45 cents it was when John could start from 30 fries. This should not be a surprise, though. We can look at it from three points of view, and they all agree that the Marginal Benefits SHOULD depend on the starting point. First, starting from just 15 fries, John is going to be hungrier, so it might make sense if he wants to fill up a little more on fries. Second, John is richer in the first example than in the second -- starting from 30 fries is starting from 90 cents, while starting from 15 fries is starting from 45 cents. The richer people are, the more they usually are willing to pay for the goods they buy -- and we are measuring benefits in terms of the person's willingness to pay. Finally, we remember that the marginal benefit curve is the individual demand curve. When a person's income or wealth drops, their demand for most goods and services will decrease, and that's what has happened here -- starting off from less income, the demand for wings is less.

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