A Note on Measurement of Utility Paul A. Samuelson The Review of Economic Studies, Vol. 4, No. 2 (Feb., 1937), 155-161. Stable URL: httplinksjstor.orgsici?sick=034-6527% 28 193702%204%3A2%3C155%3AANOMOUGSE20.COWSB2-4 The Review of Economic Studies is currently published by The Review of Economic Studies Lid, Your use of the ISTOR archive indicates your acceptance of ISTOR's Terms and Conditions of Use, available at flip: feworwjtor org/aboutterms.htmal. ISTOR's Terms and Conditions of Use provides, in par, that unless you fave obtained pcior permission, you may not dowaload an cnt isus of @ journal or multiple copies of articles, and you may use content inthe ISTOR archive only for your personal, non-commercial uss. Please contact the publisher cegarding any further use of this work. Publisher contact information may be obtained at bhupsferwer,jstor.org/joumals/tesL.tml. 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For more information regarding ISTOR, please contact support @jstor.org- up:tvwwjstor.orgy Sat Feb $ 13:48:11 2005A Note on Measurement of Utility THE. possibility of measuring the marginal utility of income from budgetary studies and market behaviour has been investigated by many writers In this note a possible alternative method, resting upon different assumptions, is presented, not 50 much in the hope of furthering inductive investigation in these matters a5 of bringing out certain theoretical relations between the variables under consideration, In order to arrive inductively at the measurement of utility, essentially a subjective quantity, it is necessary to place the individual (homo economicus) whose scale is sought under certain ideal circumstances where his observable behaviour will render open to snambiguous inference the form of the function which he is conceived of as maximising. ‘As has long been known, the behaviour of an individual in the market, when confronted with various price combinations and under limitations of various incomes, is not in itself sufficient to determine the form of his utility funetion, but can only give us at best a system of indifference loci to witch an infinite ‘number of utility indexes might have given rise, integrability conditions being met.* Under the following four assumptions, it is believed possible to arrive theoretically at a precise measure of the marginal utility of money income to an individual whose tastes maintain a certain invariance throughout the time . and during which time the prices of all goods remain 1 ining Ph, Reo Raye Hor of JB. 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Tt is the form of this function which we are trying to determine. Utility (U) of income (2) js regarded as a time flow, a rate per unit-time. Marginal (degree of) utility is the cate of utility per dollar (X), per unit of time with dimension (OX-1T-4), Mathematically Ue) fee etieteeteteeeneee i) where x representing money income per unit-time is of dimension (XT), 2, During any specified period of time, the individual behaves so as to maximise the sus of all future ssilities, they being reduced to comparable magni- tudes by suitable time discounting. This s in the natute of an axiom, or definition, not subject to proof in any empirical sense, since any and all types of observable behaviour might conceivably result from such an assumption. Mathematically, the following integral is to be made a maximum subject to side conditions to be imposed later: J=RBV Goa - @) where the beginning of the time period under consideration is taken as the origin along the time scale, and where b represents the end of this time period, here taken as finite. 43, The individual discounts future ubilities in. some simple regular fashion ‘which is bnown to us. For simplicity, we assuume in the first instance that the rate of discount of future utilities isa constant. This constant might of course bbe such that there is no time preference whatsoever, or even a premium on future ublities, This third assumption, unlike the previous two, is in the nature of an hypothesis, subject to refutation by the observable facts, icc. refutation in the sense of proved inconsistency with the previous axioms. Moreover, this assumption, added to the previous ones, serves to limit our marginal utility function to 2 sub-class of all possible functions, from which sub-class it will be possible to identify a unique utility function, The arbitrari- ness of these assurnptions is again stressed mathematically : V (x,t) = Oe . vee @) where » bears the following familiar relationship to the rate of discount {positive or negative) p, here asstimed to be constant : w= log e(t+9) : Ba In accordance with this assumption we may re-write equation (2) 38 follows J = SU (e-* dt . (a (4) We define an ideal set of experimental conditions under which the individual under observation must act. The individual is given an initiat sum ‘of money (S), upon which he may draw at will, All money not drawn upon beats interest, compounded at a given rate. Moreover, the individual must so allocate his expenditures that there be no balance leét at the end of theA NOTE ON MEASUREMENT O¥ UTILITY 157 period. Mathematically, we may state this 2s the imposition of the following isoparametrical side condition on the previous functional to be made a ‘maximum = Sa fleet ae where 7 corresponds to the return on the unused balance. Given these assumptions, it is possible to state certain necessary conditions between the tine shape of income expenditure, an observable phenomenon, and the marginal utility of money income. Without knowing the form of the utility function itself, we can state on 2 priori mathematical grounds these relationships. Later from the actual observable shape of the income ‘expenditure as a function of time, we shall be able to deduce the actual shape of the utility function, invariant except for a linear transformation, icc. scale and origin constants. In order to simplify the exposition of the necessary conditions of a ‘maximum of (3), subject to the side conditions (4), we may avail ourselves of a Lagrange tnultiplier 2, and reduce our problem to the equivalent oné of maximising the following functional BU whet AL Prgn(the-el—S} 4) A necessary condition that this functional be a maximum, may be secured heuristically by disregarding the integral signs, and differentiating with respect to x, treating it as an independent variable. ‘This yields ws the following Enler-necessary condition for a maximum : 1 U werent ao., oO where U" (x) represents the marginal uy o of inoorne, We may re-write this as follows : Ure) = det - 6) Here we have the precise way in which marginal utility will vary through fie under the assumptions we have made, In 6 and 6.is a constant depend, ing upon the original amount of money S, and the actual unit in terms of which utility is reckoned. From 6’, we can solve explicitly for x as a function of ¢ providing that we know the form of the utility funetion, On the other hand, and this is the object of our search, if we know x as a fonction of f, we can always arrive at the form of the utility function Now, by observing the results of our experiment (i.e, the behaviour of the individual in the allocation of his expenditures over time), we arrive at an empirical function between + and ¢ as follows : ceceeceeee (8) ne O) + For the purpoce ofthis paper it dose not skom advisabo to go into the probtem of providing adgiticnal neceesry conditions or suRiciency conditions. Ata late point, were relevant, notice ‘wl taken of another neceatary coadition. Furthermore, twa falows we akould trent all fonctions asf stoglewvalved. Where this i bojtstifed, the argument may te easily modshed.