Exercise 3 - 30 pts Consider the following economy with production. There is a firm which can turn one unit of oranges into two apples, or two units...
Question

# Exercise 3 - 30 pts

Consider the following economy with production. There is a firm which can turn one unit of oranges into two apples, or two units of oranges into three apples. There is a consumer who is endowed with two oranges. The consumer sees apples and oranges as perfect complements, i.e. her utility function for consuming apples a and oranges o is,

u = min(o, a)

Restrict your attention to allocations that have only integer values - i.e. it is not possible

to demand or supply fractional units of either good.

1. What is the set of Pareto Optimal allocations? (10 pts)
2. Consider the price system where po/pa = 2. What are the firm's profit-maximizing production plans? What are the firm's profits? (10 pts)
3. Is po/pa = 2 an equilibrium price ratio? Explain. (10 pts)

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