Max has a utility function U(x, y) = 2xy + 1. The prices of x and y are both $1 and Max has an income of $20.
a. How much of each good will he demand?
b. Draw a budget line and indifference curve to illustrate your solution in a
c. A tax is placed on x so that x now costs Max $1.25 while his income and the price of y stay the same. How much of good x does he now demand?
d. Draw a new budget line to reflect the after-tax price of good y, and illustrate the optimal solution from questions c.
e. When the tax was imposed and at same time Max’s income rose by an amount equal of $1 times optimal consumption of x under part (c), would Max be as well off as he was before the tax?