A candy bar maker produces a chocolate bar of a size which permits 10 nominal bites and which sells for a price of $1.00.

 Ongoing monetary supply inflation has increased the manufacturer's factor costs and forced him to decide between increasing the price to $1.10 or reducing the size to 9 nominal bites.

PART I

Considering only the effects of the manufacturer's decision, analyze and contrast both choices in terms of the directional effects on -- 

1. The purchasing power of the dollar.

2. The standard of living.

3. The cost of living.

4. The impact on the purchaser.

and decide which choice is more beneficial to society as a whole, as an unintended consequence to the manufacturer serving the interest of his shareholders.

PART II

What changes if the problem substitutes a bag of 10 individually-wrapped cough drops for the candy bar?

Hint --

 Apply the Law of  Diminishing Marginal Utility

Answers --

First of all, compare the alternatives of raising the price and reducing the size in terms of their effect on the consumer.

When the size of the candy bar is reduced from 10 bites to 9 bites, this is a subjective impact which is made for the application of the law of diminishing marginal utility. The reduction of one bite always is the loss of the last bite, the tenth. But we know that every successive bite has less subjective marginal utility than the previous one, and the experience of consuming a 9 bite bar may be almost imperceptably inferior to consuming the 10 bite bar. In this case, what is being purchased is a total candy bar for immediate consumption, and not a specific number of bites.

When the price of the candy bar is increased by a dime, the opposite occurs. If the consumer starts out with 12 dimes, the 11th dime is now the last dime spent, and reduces his residual from 2 dimes to 1 dime. Whereas before, the 10th and last dime spent only reduces his residual from 3 dimes to 2 dimes. Every sucessive dime spent is of higher subjective utility than the previous one.

From the above, it seems clear that reducing the size of the bar is almost always better for the consumer than increasing the price. This is because the sacrificed bite will be the least significant of all the bites, while the sacrificed dime will be the most significant of all the dimes.

This is a good point to jump ahead to Part II, where a bag of individually wrapped cough drops is substituted for the candy bar. The difference is that the bag is not consumed as a whole, but that its contents are individually consumed over time as needed. In this case there is no diminishing marginal utility with the number of drops and a cost per drop makes more sense than a cost per bite would have for the candy bar. However, the overall effect is still the same, or possibly larger. For the sacrificed tenth drop to be significant, we must assume that it would have been still available for use possibly months or years downstream, and not lost. Also, the fact that the cough drops are only used over time means that the tenth and last drop must suffer a time preference discount when reflected back to the time of purchase. With all of this in mind, it still seems likely that the consumer is better off with a reduced size product as opposed to a higher price. It should be noted that these are not universally true results, but are strongly dependent on context. A reduction in the size of a can of engine oil is largely a true reduction.

The choice of a price increase will result in :

- a loss in purchasing power for the dollar

- an increase in the cost of living

- a reduction in the standard of living

The choice of a size reduction will result in :

- no change in the purchasing power of the dollar

- no change in the cost of living

- a small reduction in the standard of living.

Finally, society as a whole benefits from the choice of a size reduction as compared to the cost increase.