Problem 4 Anita buys pies (x) and champagne (y) with her income of \$64. The price of champagne is Py

Problem 4 Anita buys pies (x) and champagne (y) with her income of \$64. The price of champagne is Py = \$8 per bottle. Pies cost Px = \$4 per pie if she buys upto 8 pies, and \$8 per pie if she buys more than 8 pies. Her utility function is Cobb-Douglas: u(x, y) = 3xy3 + 21. (a) How much champagne and pies does she buy given the budget constraint? (b) Suppose the government charges a 10% ad valorem tax (a sales tax) on champagne. Find Anita’s new optimal choice for pies and champagne. (c) If the government offered a \$2 quantity subsidy on champagne, would that change Anita’s consumption

Problem 4 Anita buys pies (x) and champagne (y) with her income of \$64. The price of champagne is Py = \$8 per bottle. Pies cost Px = \$4 per pie if she buys upto 8 pies, and \$8 per pie if she buys more than 8 pies. Her utility function is Cobb-Douglas: u(x, y) = 3xy3 + 21. (a) How much champagne and pies does she buy given the budget constraint? (b) Suppose the government charges a 10% ad valorem tax (a sales tax) on champagne. Find Anita’s new optimal choice for pies and champagne. (c) If the government offered a \$2 quantity subsidy on champagne, would that change Anita’s consumption ofchampagne? If so, would Anita consume more or less cham- pagne than she did before? Explain why or why not.

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