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Question: 4 mrs smith likes to drink wine in particular a...

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4. Mrs Smith likes to drink wine; in particular, a french bordeaux (f) at 840 per bottle and a California varietal wine (c) priced at $8. She allocates $600 to these two each month; and her utility is: U(f,c)-f/3c1/3 a) Write out Mrs Smith (constrained) utility maximization problem. Solve for the optimal consumption of wine f and c. b) Suppose the price of f falls to $20, but c continues to be priced at 88. How much of each wine will she buy under these altered conditions! (c) How would you put a monetary value on this utility increase in (b) over (a)? [Hint: Find compensating variation, CV: the expenditure required for the higher U level in (b) at the set of old prices; or alternatively, find equivalent variation EV: that is, expenditure required to stay on lower U level in (a) at the new set of prices]

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