Adam Smith has the following linear preferences over black tea (b) and earl gray tea (e) u(b, e) = 5b + 4e (a) Setup the expenditure minimization problem for Adam Smith. What conditions, (UC) or (NNC), will necessarily be binding at the optimum? Explain your answer. (Points: 5) Assume the price for a cup of black tea is pb = £10 and the minimal level of utility Adam Smith can obtain is ū = 40. (b) Solve the expenditure minimization problem and obtain the compensated demand as a function of the price of the cup of earl gray. (Points: 8) (c) Graph Adam Smith's compensated demand for earl grey
