1. Barry and Larissa divide their incomes, mB and mL (respectively), between liters of chocolate milk, C, and regular milk, R. The price of one liter of chocolate milk is PC; the price of one liter of regular milk is PR. Barry's preferences over chocolate and regular milk are described by the utility function, U 3(0, R) 2 20 + 5R. Larissa has very different preferences from Barry and her demand for chocolate milk is C}: = 215. (40 points) (a) Suppose Barry has C > 5 liters of chocolate milk and R liters of regular milk. If he gives up 5 liters of chocolate milk, how many liters of regular milk must he gain to remain indifferent? (5 points) (b) Solve for Barry's demands for chocolate and regular milk. (10 points) (c) Starting from initial prices, PC and PR, suppose a ,6 1 tax is levied on chocolate milk. Explain why Barry might be just as well off before and after the tax. (5 points) (d) Continuing with part (c). Holding all else constant, can Larissa ever be indifferent to a 1 tax on chocolate milk? If not, explain why your answer differs from part (c). (5 points) (e) Suppose the prices are PC 2 PR 2 2. Draw Larissa's Engel curve for regular milk. Put m L on the horizontal axis and R on the vertical axis. Label the slope of the Engel curve. (5 points) (f) Suppose Larissa's income is 771,; = 16. Starting from initial prices PC 2 PR 2 2, suppose the price of regular milk increases to P; = 4. For Larissa: Compute the total effect of the price change on consumption of regular milk and decompose the total effect into income and Slutsky substitution effects. (10 points)