How much of each good will max demand

Reference no: EM13826883

Question:

Max has a utility function U =√ x1x2 where x1 is liters of ice-cream and x2 is boxes of strawberries. The marginal utility of a liter if ice-cream is MU1=0.5 √x2/ x1 and the marginal utility of a box of strawberries is MU2 =0.5 √x1 /x2. The prices of x1 and x2 are both $2 and Max has a budget of $80.

(a) How much of each good will Max demand?

(b) A fat-tax of $2 per liter is placed on ice-cream so that it now costs Max $4 per liter. Everything else remains the same. How much of each good does Max now consume? How much tax does he pay?

(c) Now suppose that, instead of imposing a $2 tax on ice-cream, the government imposes a $20 income tax, reducing Max's budget to $60. Would Max prefer the $2 tax on ice-cream or the $20 reduction is his budget?

Additional Information:

The question is about economics and it discuss how much of each good will Max demand? A fat-tax of $2 per liter is placed on ice-cream so that it now costs Max $4 per liter. Everything else remains the same. How much of each good does Max now consume? How much tax does he pay?

Reference no: EM13826883

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