ECO 101 Tutorial 6 Questions Summer 2022 Question 1: Suppose that you only care about two goods: (i) apples (A) and (ii) pears (P). Your utility function based upon these two goods is given by: U(A, P) = A7/3pl/3 Suppose as well that the prices for these goods are: PA = $5 Pp = $15 Note that any Utility Function of the form: U (X, Y ) = xayb implies Marginal Utilities of: MU. ay MUy bx You also have $300 to spend at a local farmers market, which sells only these apples and pears. a) What needs to be true about the ratio of apples to pears that you choose for the consumer to be optimizing (i.e. maximizing their utility). b) What point on the consumer's budget constraint satisfies this condition? In other words, where on the budget constraint do consumers therefore choose? c) Draw the budget constraint, the tangent Indifference Curve, and the optimal point of consumption (with apples on the x-axis).Question 2: Following on from Question 1, suppose that the price of pears [pp] now drops from $15 to 51!}. a] What is the new optimal point for consumers to choose on their {new} budget constraint? b1 Draw the new budget constraint, new tangent IE, and new optimal point of consumption. c] Are consumers better off? How do we know? Question 3: In ll.'.'1uestions 1 E; I, you drew the shift in the optimal point of consumption resulting from a decrease in the price of pea rs. a] Given your shift from {11 to (11, break this change down into both [I] the substitution effects and {iii the income effects for both goods. b1 Are apples and pears normal or inferior goods in this exam ple? How do 1,rou know