Exercise 5 The principle of utility maximization is used to determine optimal consumption. This exercise builds on the previous exercise. Suppose you hold a part-time job that gives you $120 per month in extra spending money. On any day of the month you can spend that money on either of two types of entertainment-an evening at home with friends, for which you usually spend $10 for snacks and drinks, or an "event" entertainment, which costs $30. Table 20.8 shows the hypothetical marginal utility that each type of entertainment provides for you during the month. Table 20.8 Total and marginal utility of two types of entertainment per month Evening at home Event entertainment (price = $10) (price = $30) Days of entertainment Marginal MU Marginal MU per month utility price utility price 180 18 600 180 18 600 170 17 480 140 14 360 140 14 360 IIIIIIIII1 140 14 360 100 10 360 100 10 100 10 0 1. Finding the optimal level of consumption with a given income involves choosing successive increments of a good (service), each of which yields: (a) The largest total utility. (b) The largest marginal utility per unit of product or activity purchased. (c) The largest marginal utility for each dollar spent. d) All of the above. 2. Divide marginal utility by the price of the event entertainment to complete Table 20.8. Before you spend any money on any activity: 3. Which activity has the highest MU/p ratio?. 4. Judging by the MU/p ratio, how many days of event entertainment should you buy before spending anything on at-home entertainment? 5. If you had $120 to spend on entertainment, how much money would you have left after buying two days of event entertainment? 6. Should you spend the entire balance from question 5 on at-home entertainment?_ 278