Suppose that a group of socially conscious

Question # 00510489 Posted By: dr.tony Updated on: 04/11/2017 09:26 AM Due on: 04/11/2017
Subject Economics Topic Macroeconomics Tutorials:
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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.

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