Ann's Well- Being Depends Upon Her Consumption of Milk (In

Essay

Ann's well- being depends upon her consumption of milk (in pints, x1)and video games (x2). Her utility function is given by: U = 3lnx₁ + x₂. Calculate her demand for milk, her demand for video games, and her optimal choice when p₁ = $3/pint, p₂ = $2/game and her income is M = $14. Now suppose the government subsidized Geoff's milk by $2 per pint, so the price of milk fell from $3 to $1.
a)Calculate:
i)How much milk Geoff would demand at the subsidized price
ii)How many video games he would demand and
iii)His level of utility
iv)The cost of the subsidy to the government.
b)If the government gave Geoff the amount calculated in part (a - iv)in cash (leaving the price of milk at its original level of $3), how much milk would he demand, how many video games, and what would his utility be?