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What is the total utility of the combination of going to the nightclub 3 times per month and the cinema 2 times per month? What combination of the two activities maximizes Ozzie's satisfaction?

Economics

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Answers

2 parts
a
350
b

3 nightclub visits and 4 cinema visits\text{3 nightclub visits and 4 cinema visits}

Step-by-step solution

7 steps

Here's the solution to Ozzie's utility maximization problem.

  • Given Information:
    • Allowance (Budget) = \100$
    • Price of a nightclub visit (PNP_N) = \20$
    • Price of a cinema ticket (PCP_C) = \10$

Part a· 3 steps

What is the total utility of the combination of going to the nightclub 3 times per month and the cinema 2 times per month?

  1. Find the total utility for 3 nightclub visits from the table.

    From the table, for 3 visits to a nightclub, Total Utility (TU) = 240.

  2. Find the total utility for 2 cinema visits from the table.

    From the table, for 2 visits to the cinema, Total Utility (TU) = 110.

  3. Calculate the combined total utility.

    Total Utility=TU (nightclub)+TU (cinema)\text{Total Utility} = \text{TU (nightclub)} + \text{TU (cinema)} Total Utility=240+110=350\text{Total Utility} = 240 + 110 = 350

    The total utility for this combination is 350\boxed{350}.

Part b

3 nightclub visits and 4 cinema visits\text{3 nightclub visits and 4 cinema visits}

What combination of the two activities maximizes Ozzie's satisfaction?

To maximize satisfaction, Ozzie must allocate his budget such that the marginal utility per dollar spent is equal for both activities (MUNPN=MUCPC\frac{MU_N}{P_N} = \frac{MU_C}{P_C}) and his total spending does not exceed his budget.

  1. Calculate the Marginal Utility (MU) for each activity.

    Marginal Utility (MU) is the change in Total Utility (TU) from consuming one more unit.

    MU=TUn−TUn−1\text{MU} = \text{TU}_n - \text{TU}_{n-1}
  2. Calculate the Marginal Utility per dollar (MU/P) for each activity.

    For nightclubs: MU_N/P_N = MU_N / \20Forcinema: For cinema:MU_C/P_C = MU_C / $10$

    Here is the completed table with MU and MU/P values:

    Visits to a nightclubTUMUMU/P_N ($/20)Visits to the cinemaTUMUMU/P_C ($/10)
    11001005.0160606.0
    2180804.02110505.0
    3240603.03150404.0
    4280402.04180303.0
    5300201.05200202.0
    6310100.56210101.0
  3. Allocate the budget ($100) by choosing the activity that provides the highest MU/P at each step until the budget is exhausted.

    • 1st purchase: Cinema (1st visit) gives 6.0 MU/.Cost:. Cost: $10.Budgetremaining:. Budget remaining: $90$.
    • 2nd purchase: Cinema (2nd visit) gives 5.0 MU/.Cost:. Cost: $10.Budgetremaining:. Budget remaining: $80$.
    • 3rd purchase: Nightclub (1st visit) gives 5.0 MU/.Cost:. Cost: $20.Budgetremaining:. Budget remaining: $60$.
    • 4th purchase: Cinema (3rd visit) gives 4.0 MU/.Cost:. Cost: $10.Budgetremaining:. Budget remaining: $50$.
    • 5th purchase: Nightclub (2nd visit) gives 4.0 MU/.Cost:. Cost: $20.Budgetremaining:. Budget remaining: $30$.
    • 6th purchase: Cinema (4th visit) gives 3.0 MU/.Cost:. Cost: $10.Budgetremaining:. Budget remaining: $20$.
    • 7th purchase: Nightclub (3rd visit) gives 3.0 MU/.Cost:. Cost: $20.Budgetremaining:. Budget remaining: $0$.
  4. Verify the total cost and the equimarginal principle.

    At this point, Ozzie has purchased:

    • 3 nightclub visits: 3 \times \20 = $60$
    • 4 cinema visits: 4 \times \10 = $40Totalexpenditure=Total expenditure =$60 + $40 = $100.Thismatchesthebudget.Atthiscombination,thelastunitofnightclubconsumedyielded3.0MU/. This matches the budget. At this combination, the last unit of nightclub consumed yielded 3.0 MU/ and the last unit of cinema consumed yielded 3.0 MU/$. The equimarginal principle is satisfied.

    The combination that maximizes Ozzie's satisfaction is 3 nightclub visits and 4 cinema visits\boxed{\text{3 nightclub visits and 4 cinema visits}}.

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