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4.   Consider an individual making choices over two goods, x and y with prices px =...

4.   Consider an individual making choices over two goods, x and y with prices px = 3 and py = 4, and who has income I = $120 and her preferences can be represented by the utility function U(x; y) = x2y2.  Suppose the government imposes a sales tax of $1 per unit on good x: ( Hint: You need to find the initial, final, and hypothetical optimal consumption bundles, their corresponding maximized utility levels and/or minimized expenditure and compare. )

Calculate the substitution effect and Income effect (on good x) after the price change.

Find the government tax revenues (T), the equivalent lump sum tax (L), and the dead weight loss (DWL). (Hint: Expenditure minimization at the final level of utility.)

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