Suppose United Airlines is deciding on purchasing engines from General Electric (GE) and Rolls- Royce (RR) for its new Boeing 787 fleet with budget I=$2 billion. The airline company has utility function U (g, r) = g3r, where g are the engines produced by GE and r are the engines from RR. pg and pr are prices for each GE and RR engine respectively. The Marshallian demand functions

are g∗ = 3I and r∗ = I . 4pg 4pr

1. Find the indirect utility function for United Airlines.
2. Suppose pg = $25 million and pr = $20 million. What is United's maximized utility? How many GE engines do they purchase?
3. Now suppose the U.S. Department of Commerce is trying to promote American engine man- ufacturers. Thus United Airlines will be given a 10% subsidy on price when purchasing from GE, and levied a 15% tax on price when purchasing from RR.
4. How does this policy affect United's budget constraint? Write down the new budget and draw the old/new budget in the same graph.
5. How many GE engines are purchased?
6. What is the utility level of United Airlines with this policy?
7. What is the total tax that United has to pay for purchasing the RR engines?