Question: Max has the utility function U ( x , y ) = 2 x y. The price of x is P x = $4 and

Max has the utility function U(x, y) = 2xy. The price of x is Px = $4 and the price of y is Py = $2. Income m = $40. (12 pts total)

  1. Show if Max can afford 5 units of x and 8 units of y. (1 pts)
  2. What is the maximum amount of x Max can afford? What is the maximum amount of y Max can afford? (2 pts)
  3. Calculate the slope of the budget line. (1pts)
  4. Does Max prefer bundle A which has 3 units of x and 4 units of y or bundle B which has 2 units of x and 6 units of y? (1 pts)
  5. Find out how much x and how much y Max will demand at the optimal choice. (4 pts)
  6. Suppose price of y changes to Py = $4. Draw the new budget line and identify any new intercept. (1 pts)
  7. How much x and how much y does Max demand now?

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