Olive has the utility function U(X,Y) = X1/3Y2/3, where X is the quantity of apples consumed, and Y is the quantity of oranges consumed. Let income be I = 90.

(a) Suppose that the price of apples is PXa = 2 and the price of oranges is PY = 2. What are the quantities of apples and oranges demanded when Olive maximizes her utility subject to her budget constraint?

(b) Suppose that the price of apples decreases to PXb = 1 and the price of oranges stays constant at PY = 2. What are the quantities of apples and oranges demanded by Olive after this price change?

(c) What is the substitution effect from the price change above? [Hint: what is the expenditure minimizing way of achieving the utility level in part (a) at the prices in part (b)?]

(d) What is the income effect from the price change above? [Hint: what is the difference between the total effect in part (b) and the substitution effect in part (c)?

2) Ron eats scallops and beef jerky. His income is $20, and when scallops cost $2 per unit)and beef jerky costs $1 unit, Ron consumes 6 scallops and 8 units of beef jerky (point A). But when the price of scallops rises to $4( Ron consumes 2 scallops and 12 units of beef jerky (point B)) eef jerky a. Separate the change in the consumption of scallops 20 into the substitution effect and the income effect. Which is larger? b. Are scallops a normal good or an inferior good? 14-- B Explain briefly. U2 c. Is beef jerky a normal good or an inferior good? Explain briefly. BC, BC 0 9 10 Scallops10. Suppose a firm is producing 2,475 units of output by hiring 50 workers (W = $20 per hour) and 25 units of capital (R = $10 per hour). The marginal product of labor and marginal product of capital are 40 and 25, respectively. Is the firm minimizing the cost of producing 2,475 units of output? A) No, the firm should use more labor and less capital. B) No, the firm should use more of both labor and capital. C) Yes, the ratio of the number of workers to the wage equals the ratio of the number of units of capital to the rental rate. D) No, the firm should use more capital and less labor