2. (35 Points) Andrea likes carrots (r) and beef (y). Her indirect utility function is given by: V ( P. .P. !) = (6 6 6) (a) (5 Points) Find Andrea's hicksian demands for carrots h, and for beef hy. Solution: (b) (5 Points) What is Andrea's expenditure function? Solution: (c) (5 Points) What are Andrea's marshallian demands for carrots g, and beef gy? Solution: (d) (5 Points) Use the Slutsky Equation to find the substitution and income effects of a change in the price p. on demand for carrots (x) Solution: (e) (5 Points) The prices and income are currently p, = 1, p, = 2, and / = 24. But the government decide to introduce a 2% sales tax on the price of beef (py), which is compensated by an increase in income that allows Andrea to stay on the same indifference curve. By what percentage does the demand for beef (y) change? (You should think of the 2% increase as a small increase in the price). (f) (5 Points) Consider again as a starting point that p, = 1, p, = 2, 1 = 24. The government introduces a 2% subsidy on the price of carrots (p.). By what percentage does the demand for carrots (r) change? Solution: (g) (5 Points) Once again, the starting point is p. = 1, p, = 2, / = 24. Due to the recent COVID pandemic the price of beef increases by 50%. The government decides to send a check to Andrea to allow her to stay on the same indifference curve. Compute the value of the check and find the substitution effect for beef (). (You should think of the 50% change as a large change in the price). Solution