THE EXCHANGE BETWEEN QUANTITY AND QUALITY,
RAND CORP SANTA MONICA CALIF
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H. Theil has pointed out that under certain conditions the choice between quality and quantity of a commodity involves a consumers budget line which is convex to the origin. This convexity leads to instability of the tangency solution if it should happen that the utility isoquant is of lesser curvature than the cost isoquant when this is the case, the point of tangency will represent the worst rather than the best position along any given isoquant. It appears that quite plausible assumptions may lead to convex cost isoquants for the consumer, firm, or economy in spite of the fact that the marginal rate of substitution behaves rather strangely for such isoquants. The main purposes of this note are to look into the question of how general such isoquants and resulting instabilities may be in the quality-quantity problem, considering not merely the possible mathematical formulations of the cost function but also taking into account economic instuition.