Question

Suppose Haya has 120 of income left each week after Suppose Haya has $120 of income left each week after she pays her bills and puts some money away in a savings account, and she has two ways to spend this extra money: go to the movies which costs $18 with popcorn and soda, or go out to a club which costs $33 including the cover charge and drinks. Assuming these are her only two choices to spend the extra money, what can you say about the following bundles of going to the movies and clubbing? Which of these could possibly be the utility-maximizing bundle?

a. 3 movies and 2 nights out at the club

b. 2 movies and 3 nights out at the club

c. 2 movies and 2 nights out at the club

Answer 1

Total cost of Bundle (a) ($) = 3 x 18 + 2 x 33 = 54 + 66 = 120

Total cost of Bundle (b) ($) = 2 x 18 + 3 x 33 = 36 + 99 = 135

Total cost of Bundle (c) ($) = 2 x 18 + 2 x 33 = 36 + 66 = 102

Out of these bundles, (b) is unattainable since it exceeds the budget ($135 > $120), and (c) indicates under-utilization of budget since total cost is less than budget ($102 < $120). Only bundle (a) exhausts the budget and this is most likely the utility-maximizing bundle.