Complementary goods in home economics

Kragen Javier Sitaker, 2017-07-19 (3 minutes)

Suppose you have a budget of US$1000 to spend on two complementary goods, A and B. The benefit you get from the combination is jointly proportional to the quantity of A and the quantity of B that you purchase. Then you should spend US$500 on A and US$500 on B, because if x is the amount you spend, your benefit is proportional to x(US$1000-x), whose maximum is at x=US$500. Note that this doesn’t depend on the unit prices of A and B!

And it only depends a little bit on constant offsets, for example if spending x on B gets you 10 + x/$15 units of B; you can simply impute the cost of the constant offset to your budget and spending on B, in this case pretending that you are spending US$150 more on B than you really are, out of a total budget of US$1150. (So in that case you want to spend US$575 on A and US$425 on B.)

You’d think that if there are three analogously complementary goods involved, you should probably spend equally on each of the three. And yes, it turns out that although xy(1-x-y) blows up to positive infinity in several different directions, its only maximum for positive x and y is at x=y=(1-x-y).

I think this reasoning is applicable fairly generally in home economics, although you have to contend with diminishing returns as well.

For example, spending US$1000 a month in rent and maintenance costs on your apartment implies that you should probably also spend US$1000 a month to decorate it, or whatever else makes it enjoyable. If you’re spending more than that on decoration, maybe you would enjoy it more if you moved into a bigger apartment and spent a bit less on decoration; and if you’re spending less than that on decoration, maybe you should move into a smaller apartment so as to have more money to make it habitable.

Here I’m assuming that “maintenance” costs like cleaning and repairs, as well as your rent, scale proportional to the size of the apartment (adjusted by some quality factor), but there are cases where this is backwards — some kinds of maintenance, like repairing damages from a leaky roof, are a matter of wasting money as a result of renting a low-quality good. In those cases, it would be more intelligent to rent a higher-quality good instead of wasting money on maintenance.

Does this mean that spending US$500 a month on car payments (or the time-adjusted equivalent in up-front costs) implies that you should probably also spend US$500 a month on mileage-proportional costs such as fuel, oil changes, and maintenance?

Having a nicer, faster, or more efficient car means that time you spend in the car is more pleasant, and you can travel proportionally further in the same time. But if that expense means that you don’t have enough money to pay US$500 a month in variable costs, maybe you would get more value out of a cheaper car that you could afford to drive more.

But maybe you have a lot of money and not that much time to spend traveling in the car.

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