(c) Illustrate on an isoquant/isocost graph the difference between your answers to part a and b. Explain intuitively why long run costs should always be lower than short run costs. 3. (20 points) Mead N. Taters' expenditure function is defined by: 2 3 e(p, u) = 2pappu where p, is the price of steak and p, is the price of potatoes. The government proposes a farm subsidy program that would reduce the price of steak to $1.00 per pound. It also proposes an increase in income tax to pay for the program. (a) Illustrate graphically the largest increase in income tax that Mead would be willing to pay to secure the lower price for steak. (b) Calculate the largest increase in income tax that Mead would be willing to pay to secure the lower price for steak as a function of his income level (w) and the original prices of steak and potatoes. 4. (15 points) Since 1979, low-income recipients have been given food stamps without charge. However, before 1979, people bought food stamps at a subsidized rate. For example, to get $1 worth of food stamps, a household paid about $0.20 (the exact amount varied by household characteristics and other factors). Assume the individual has income of $70.00 per month. Illustrate on a well anno- tatod graph the budget constraint facing an individual if that individual may buy up to $50.00 per month in food stamps at $0.20 per cach $1 coupon? Compare this con- straint to the original budget constraint with no assistance and the budget constraint if the individual receives $50.00 of food stamps for free. Which version of the food stamp program would the consumer prefer? Which version of the food stamp program would result in greater purchases of food? Explain your answer. 5. (15 points) State whether the following is true, false or uncertain and explain your answer briefly both in words and graphically. If an increase in the price of potatoes leads potato farmers to increase their consumption of potatoes and to reduce the quantity they sell, then these farmers consider potatoes to be an inferior good