Mead N. Taters' expenditure function is dened by:

e

(

p;u

) = 2

p

2

5

s

p

3

5

t

u

where

p

s

is the price of steak and

p

t

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.