In scene 2, Viola notes the great irony inherent in her present situation. That Olivia is in love with Cesario, who the audience knows to be Viola, is an instance of dramatic irony that will cause mayhem throughout the play; but, Viola sees already how her disguise will cause problems also in her relationship with Orsino, and will hinder her from expressing her true feelings for him. She notes this bothersome contradiction, that "as I am man, my state is desperate for my master's love"; but that, "as [she is] womanŠwhat thriftless sighs shall poor Olivia breathe!" (II.ii.36-9). Viola also laments that Olivia could fall in love with Cesario so easily; she compares women's hearts to sealing wax in an apt metaphor, and notes how easily the "proper false" leaves a lasting impression in their hearts (II.ii.29). Viola's perceptive statements foreshadow some kind of confrontation with Orsino and Olivia about her true identity; and she does not look forward to disappointing either one.
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As the paragraph mentions, "That Olivia is in love with Cesario, who the audience knows to be Viola, is an instance of dramatic irony that will cause mayhem throughout the play."
Dramatic irony takes place when the audience knows something the characters don't.