Question: Max has a utility function U(x, y) = 4xy +1. The prices of x and y are both $1 and Max has an income of

Max has a utility function U(x, y) = 4xy +1. The prices of x and y are both $1 and Max has an income of $40.

A. How much of each good will he demand? Graph his budget set.

B. A tax is placed on x so that x now costs Max $2 while his income and the price of y stay the same. Illustrate this change in a different color on the graph. How much of good x does he now demand?

C. Would Max be as well off as he was before the tax if when the tax was imposed, his income rose by an amount equal to $1 times the answer to part (b)? Explain why or why not.

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