# Suppose that a group of socially conscious

Subject: Economics / Macroeconomics
Question
suppose that a group of socially conscious retailers develop a campaign to in-

duce more consumers to purchase ethical garments. The key element of their campaign

will be to attach a label to their garments that will certify that the garment has been

produced in a safe workplace overseas. The advantage of this symbol is that it will allow

a consumer to signal to society that she is socially conscious. That is, the symbol will

allow the consumer to enhance her reputation by purchasing the high-quality variety.

2

(c) [4 marks] Let us assume that the use of this symbol increases this consumer’s v from

0.5 to 1. You can also assume that D = 3, PL = 0.5, PH = 2, and I = 20. Use a

diagram with XH on the horizontal axis to illustrate this consumer’s indifference curve

for both values of v. Can you infer from this diagram alone whether the higher v makes

this consumer better off or not? Explain. [Hint: when drawing the diagrams for this part

you can assume a fixed value of u = 130.13.]

(d) [2 marks] One way to measure the magnitude of the effect of a change in v on XH is

to calculate an elasticity. Specifically, define the elasticity of XH with respect to v, ?

v

, as

?

v =

Percentage change in XH

Percentage change in v

Calculate this elasticity when v changes from 0.5 to 1. You can continue to assume

that D = 3, PL = 0.5, PH = 2, and I = 20.

Another way to increase the consumption of XH is to tax XL. This tax will raise

the price of XL, PL. We can measure the impact of such a tax using the elasticity of XH

with respect to PL. Let this be defined as

?

PL =

Percentage change in XH

Percentage change in PL

(e) [3 marks] Calculate this elasticity when PL changes from 0.5 to 1. Here you can

assume that D = 3, v = 0.5, PH = 2, and I = 20. Compare this elasticity with the one

you calculated in part

(d). What does this imply about the effectiveness of a tax on XL

relative to exploiting a consumer’s desire to engage in virtue signaling?

(f) [4 marks] State and explain two limitations of this model that might lead you to be

unconvinced that virtue signaling is more effective than the tax.