Suppose that a group of socially conscious
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.
