Can Good Apples Be Mixed with Bad Economics? a Mengerian Critique of the Alchian and Allen Theorem

The Alchian and Allen Theorem has been a popular staple of many economics classes since Armen Alchian and William Allen first introduced it in their well-known text University Economics. The theorem says that the addition of the same fixed cost to two similar goods will result in an increase of demand for the higher-priced, “higher quality” good relative to the lowerquality item. We review some of the literature, and use Carl Menger‘s economic analysis to challenge the theorem’s validity. Based on Menger’s analysis, we conclude that the theorem is highly questionable. Further, we find evidence that Alchian and Allen themselves unwittingly contradict their own theorem elsewhere in one of their texts.