Question

Q1 Take a typical worker, Jordan. Before the onset of COVID-19, Jordon earned $30 per hour (after taxation) in their job. Assume that Jordan has no other sources of income or savings. Write down the equation of Jordan’s consumption budget constraint (for a single working day). Using a model with consumption on the vertical axis and hours of free time on the horizontal axis, plot Jordan’s budget constraint. Label all relevant elements of this diagram and state the value of the horizontal and vertical intercepts.

Q2 Now, add an indifference curve to the model you developed in Q1 and label it IC1. This indifference curve should be at a utility-maximizing point and show Jordan’s corresponding choice of consumption and hours of free time. As you have not been given any information regarding Jordan’s preferences, state one assumption that you have made about Jordan’s utility-maximizing choice and one assumption that you have made about the slope of Jordan’s indifference curve.

Q3 The arrival of COVID-19 brought financial hardship for Jordan’s employer. As a result, Jordan has had their hourly wage cut by 20% (a common occurrence around the world at the moment). Write down a new equation for Jordan’s consumption budget constraint (for a single working day). Using the same model developed in Q1-Q2, plot Jordan’s new budget constraint. Clearly state the value of the horizontal and vertical intercepts.

Q4 Now, add a second indifference curve to the model you developed in Q1-Q3 and label it IC2. This indifference curve should be at a new utility maximising point and show Jordan’s corresponding choice of consumption and hours of free time. State what has happened to Jordan’s choice of consumption and free time. What can be said about Jordan’s overall level of utility after the onset of COVID-19?

Q5 Using the model created in Q1-Q4, show the income effect, substitution effect and overall effect of Jordan’s wage decrease. Compare the relative size of the income and substitution effects shown on your model. What can be inferred about Jordan’s preferences for free time and consumption from this comparison?

Q6 Explain the economic link between opportunity cost and a decrease in wages. How might this have impacted Jordan’s utility maximising choice?

Q7 Economists have predicted that the outbreak of COVID-19 will lead to large decreases in the gross domestic product (GDP) of many countries. Discuss the pros and cons of using GDP to measure the impact of COVID-19 on economic activity.

Several government policies have been proposed to attempt to mitigate the economic effects of COVID-19. Some are using traditional monetary and fiscal policies (such as cutting interest rates, quantitative easing and bailouts). Others are trying out non-traditional methods (such as direct cash transfers, loans to businesses conditional on maintaining employment and wage subsidies).

The Australian Government has implemented several economic measures in response to COVID-19. These include providing two separate $750 payments to social security, veteran and other income support recipients to support households. They are also expanding eligibility to income support payments and establishing a new, time-limited Coronavirus supplement to be paid at a rate of $550 per fortnight to eligible recipients.

Q8 From a consequentialist perspective, is the introduction of payments to support households and income during the COVID-19 crisis (described above) ethically justified?

Q9 Using a deontological ethical framework, construct an argument either in favour of the payments to support households and income during the COVID-19 crisis (described above) or against them.

Q10 Evaluate the introduction of the payments to support households and income during the COVID-19 crisis (described above) from the perspective of substantive and procedural judgements of fairness.

Answer 1

Q(1)

In a day there are 24 hours which Jordan can allocate between working and enjoying free time. So time endowment, T=24
While he works, Jordan earns $30 per hour. So, given that Jordan has no other sources of income or
savings, the maximum income that he can have in a day is when he works continuously for 24 hours. In that
case, Jordan's income = 24*$30 = $720
If he decides to enjoy the entire day, then he would get 24 hours of leisure and $0 consumption. Hence, the
x-intercept is 24 hours.
The Price of leisure can be measured by taking into consideration the opportunity cost of leisure. When Jordan
indulges in 1 hour of leisure, he foregoes $30 (which he would have earned by working the same hour).
Hence, opportunity cost of leisure = $30. So, price of leisure = opportuinty cost = $30.
Let the price of consumption be p2. If he spends 24 hours working, then he can get $720/p2 units of
consumption. Hence, y-intercept = $720/p2.
Jordan’s consumption budget constraint
p2*C + w* l = 720
p2 * C + 30 * l= 720
Where p2 = price of consumption
C = consumption
w = price of leisure
l= units of leisure

Q(2)

One assumption you made regarding the slope of the indifference curve in Jordan: the averages are
Preferred to extremes: if Jordan consumes more, it is willing to substitute more consumption in order to obtain an additional free time. Likewise, if Jordan has more free time, then he's willing to substitute more leisure to obtain an additional unit of consumption. The corresponding consumption choice for Jordan at the utility-maximizing stage is C1 and free time hours are L1.

Q(3)

Jordan has had their hourly wage cut by 20% due to COVID-19.

Jordan's new wage = $30- 20% of $30
= $30-$6 = $24
While he works, Jordan earns $24 per hour. So, given that Jordan has no other sources of income or
savings, the maximum income that he can have in a day is when he works continuously for 24 hours. In that
case, Jordan's income = 24*$24 = $576.
If he decides to enjoy the entire day, then he would get 24 hours of leisure and $0 consumption. Hence, the
x-intercept is 24 hours. X-intercept remains the same because the number of hours in a day has not
changed.
The price of leisure can be measured by taking into consideration the opportunity cost of leisure. When Jordan
indulges in 1 hour of leisure, he foregoes $24 (which he would have earned by working the same hour).
Hence, the opportunity cost of leisure = $24. So, price of leisure = opportunity cost = $24.
Let the price of consumption be p2. If he spends 24 hours working, then he can get $576/p2 units of
consumption. Hence, y-intercept = $576/p2.
Jordan’s consumption budget constraint
p2*C + w* l = 576
p2 * C + 24 * l = 576
Where p2 = price of consumption
C = consumption
w = price of leisure
l = units of leisure

Q(4)

Jordan’s corresponding choice of consumption at the new utility-maximizing point is C2 and hours of free time is L2. Jordan decided to consume less and enjoy more. Jordan’s overall level of utility after the onset of COVID-19 has appeared to fall because he is now consuming at a lower level of utility (IC2) as compared to before.