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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?
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2 partsStep-by-step solution
7 stepsHere's the solution to Ozzie's utility maximization problem.
- Given Information:
- Allowance (Budget) =
\100$ - Price of a nightclub visit () =
\20$ - Price of a cinema ticket () =
\10$
- Allowance (Budget) =
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?
Find the total utility for 3 nightclub visits from the table.
From the table, for 3 visits to a nightclub, Total Utility (TU) = 240.
Find the total utility for 2 cinema visits from the table.
From the table, for 2 visits to the cinema, Total Utility (TU) = 110.
Calculate the combined total utility.
The total utility for this combination is .
Part b
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 () and his total spending does not exceed his budget.
Calculate the Marginal Utility (MU) for each activity.
Marginal Utility (MU) is the change in Total Utility (TU) from consuming one more unit.
Calculate the Marginal Utility per dollar (MU/P) for each activity.
For nightclubs:
MU_N/P_N = MU_N / \20MU_C/P_C = MU_C / $10$Here is the completed table with MU and MU/P values:
Visits to a nightclub TU MU MU/P_N ($/20) Visits to the cinema TU MU MU/P_C ($/10) 1 100 100 5.0 1 60 60 6.0 2 180 80 4.0 2 110 50 5.0 3 240 60 3.0 3 150 40 4.0 4 280 40 2.0 4 180 30 3.0 5 300 20 1.0 5 200 20 2.0 6 310 10 0.5 6 210 10 1.0 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/$10$90$.
- 2nd purchase: Cinema (2nd visit) gives 5.0 MU/$10$80$.
- 3rd purchase: Nightclub (1st visit) gives 5.0 MU/$20$60$.
- 4th purchase: Cinema (3rd visit) gives 4.0 MU/$10$50$.
- 5th purchase: Nightclub (2nd visit) gives 4.0 MU/$20$30$.
- 6th purchase: Cinema (4th visit) gives 3.0 MU/$10$20$.
- 7th purchase: Nightclub (3rd visit) gives 3.0 MU/$20$0$.
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 = $40$60 + $40 = $100 and the last unit of cinema consumed yielded 3.0 MU/$. The equimarginal principle is satisfied.
The combination that maximizes Ozzie's satisfaction is .
- 3 nightclub visits:
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