Question

Tom has a weekly allowance of $24, all of which he spends on pizza and movie rentals. Pizza is $6 a slice and rentals are $3 each.

1. Make a table for slices 0 to 8, which have the following total utility………..0, 20, 36, 48, 58, 66, 72, 76, 78.

Include in the table the movie rentals from 0-8 which have the following total utility…..0, 40, 46, 50, 54, 56, 57, 57, 57

HINT- It is marginal utility that will decide this; include that on the table as well. Oh, no, it is actually marginal utility per dollar that you need. Include that as well in your table and now you are ready to solve. Explain your process.

          PIZZA                                                   MOVIES

Q     T.U.     M.U .   MU/P                          Q   T.U.   M.U.   M.U./P

0      0                                                             0     0

1     20                                                            1    40

2     36                                                            2    46

3     48                                                            3    50

4     58                                                            4    54

5     66                                                            5    56

6     72                                                            6    57

7     76                                                            7    57

8     78                                                            8    57

2. How many movie rentals and pizza slices should Tom consume each week? Show work and explain.
3. What is Tom’s total utility from consuming the pizza and movies? Show.

Answer 1

a ) Ans:

PIZZA				MOVIES
Q	T.U.	M.U	MU/P	Q	T.U.	M.U	MU/P
0	0	--	--	0	0	--	--
1	20	20	3.33	1	40	40	13.33
2	36	16	2.67	2	46	6	2.00
3	48	12	2.00	3	50	4	1.33
4	58	10	1.67	4	54	4	1.33
5	66	8	1.33	5	56	2	0.67
6	72	6	1.00	6	57	1	0.33
7	76	4	0.67	7	57	0	0.00
8	78	2	0.33	8	57	0	0.00

Explanation:

MU = Change in TU / Change in Q

b ) Ans: Tom should consume 3 slices of pizza and 2 movie rental .

Explanation:

Utility maximization condition is where ;

MU_pizza / Price of pizza = MU_{movie rental} / Price of movie rental.

And entire budget or given money income should be spend on both these goods.

Y = (Price of pizza * Quantity of pizza ) + ( Price of movie rentals * Quantity of movie rental

$24 =( $6 * 3 ) + ( $3 * 2)

c ) Ans: Tom's total utility from consuming the pizzas and movies is 94

Explanation:

TU at 3 slices of pizza = 48

TU at 2 movie rental = 46

Total utility = 48 + 46 = 94