The concept of the satisfaction function is applied to the situation in which two individuals may each produce two needed objects of satisfaction, or may each produce only one of the objects and then make a partial exchange. It is shown that with a logarithmic satisfaction function there is no advantage in a division of labor, unless such a division materially increases the purely physical efficiency of production. This result appears to be connected with the particular choice of the form of satisfaction function (logarithmic). While the problem has not been solved for other forms, it is made plausible that satisfaction functions which have an asymptote will lead to a different result.
Next the case is studied in which division of labor occurs between two groups of individuals. It is shown that in this case the relative sizes of the two groups are determined from considerations of maximum satisfaction. Possible applications to problems of urbanization are suggested.