Max Has a Utility Function U(x, Y) = 2xy

question 35

Short Answer

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. A tax is placed on x so that x now costs Max $2 while his income and the price of y stay the same. 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)?

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Definitions:

Situational Attribution

Attributing an individual's behavior to external circumstances rather than to internal characteristics.

Unstable

Lacking consistency or predictability; prone to rapid or unexpected change.

Uncontrollable

Refers to anything beyond one's power or authority to command, regulate, or restrain.

Fundamental Attribution Error

The fundamental attribution error is a cognitive bias where people disproportionately attribute others' actions to their personality or disposition rather than situational factors.