Mead N. Taters likes only Steak (S) and potatoes (T), and gets utility from them according to:

U = S^1/4T^3/4

No matter how much Mead has to spend on groceries and no matter what the prices of steak and potatoes are, he always spends (1)_________ % on steak and (2)________ % on potatoes.Thus, if Mead has $20.00 to spend on groceries, he will spend (3) $______ on steak and (4) $______ on potatoes.If the price of steak is $2.00 per pound and the price of potatoes, p_t, is $.50 per pound, he will buy (5)______ pounds of steak and (6)________ pounds of potatoes.If the amount he has to spend on groceries, the price of steak, and the price of potatoes all double, he will then buy (7)______pounds of steak and (8)_______ pounds of potatoes.Would answers (7) and (8) change if Mead had any alternative "well-behaved" utility function like a CES utility function? (9)______.Why or why not? (10)____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________.

Let I represent the amount of income that Mead budgets for food.In words, what is the interpretation of P_SS/I?

(11)____________________________________________________________________________________

No matter what P_S and I are, Mead always chooses S so that P_SS/I = (12)_________________.

Now turn this relationship around and write S as a function of P_S and I: (13) S = __________.

The analogous equation for T is T = (14)_________________________.

Use your results to obtain the indirect utility function of Mead.That is, substitute your functions for S and T into hisutility function so that U is written as a function of P_S, P_t, and I:

(15) U =

Now, find Mead^,s expenditure function.That is turn your indirect utility function around so that I is a function of P_S, P_t, and U.Viewed in this way, the function tells you how much Mead has to spend in order to achieve utility level U at prices P_S and P_t:

(16) I =

Assume the same utility function, prices and income as stated in problem II.

If the price of steak increases to $2.50 per pound,

(17)S=

(18)T=

Economics 4100page 2

Draw the two budget constraints in the attached diagram with Steak on the horizontal axis and indicate the points that are chosen as well as indifference curves..

When steak is only $2.00 per pound, Mead's utility is

19)

When the price of steak rises to $2.50 per pound Mead's utility falls to

20)

At the new price, his income would have to increase to

21)

That is, the compensating variation he would need in order to offset his loss in utility is

22)

On the graph, draw what his budget constraint would be if his income did increase to this level, given the price of steak is now $2.50.Show the equilibrium points and indifference curves.

Given the new income and price of steak of $2.50

23) S=

24) T=

Label the graph completely to show income and substitution effects.

25) What level of income would be required to obtain the final level of utility if the price of steak had not changed?

26) What is the equivalent variation change in income?

27-30)

Why do economists care about using compensating variation or equivalent variation instead of consumer surplus changes for Marshallian demand curves?Explain fully.

Answer 25 and 26 as well as graph only