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Suppose that a group of socially conscious

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Subject: Economics
Due on: 04/11/2017
Posted On: 04/11/2017 09:26 AM

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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.

Tags conscious socially group suppose elasticity aume change percentage consumers marks consumer symbol calculate respect diagram measure changes allow signaling conscious socially campaign explain virtue garments increase consumption specifically magnitude effect raise define continue

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