Question

The abrupt cancellation of all travel-related activities as a consequence of the COVID-19 pandemic has generated substantial layoffs in the Tourism industry. While some people have found employment in other sectors, many remain unemployed without a clear time line for when tourism activities can fully re-open. The extended period over which these workers remain unemployed has exacerbated concerns regarding the permanent loss of skills that result in a ‘hysteresis’ effect1 , as occurred during the 2008-09 ‘Great Recession’. Suppose that economic activities in the Tourism sector do not resume any time soon. Simultaneously, suppose that the government creates a new ‘food program’ to provide necessary food to people that remain unemployed during the pandemic. Further, assume that the provision of food has no effects on the real wage w, taxes T or dividend income π. Therefore, workers in the Tourism industry face a low incentive to actually find work. In the context of the consumer optimization’s problem of Chapter 4, determine the effects the ‘food program’ on the consumer’s optimal bundle. In particular, 1. Determine the effect of the ‘food program’ on the consumer’s budget constraint. 2. Briefly explain the effect of the program on consumer’s preferences. 3. Find the new optimization point and determine the effects on C, l and N^s.

Answer 1

Coronavirus has transformed the market globally, and the tourism industry is no exemption. Moreover, it has hit the tourism industry most negatively. Due to this, the abrupt cancellation of all travel-related activities, has generated substantial layoffs in terms unemployment, GDP and economic growth all over.

Now since, the government plans to take over a food program simultaneously, in order to provide necessary food to the people unemployed and fighting their survival. Further the economy, assumes that the wage tax, taces or dividend income remain unchanged or constant, therefore the consumer tends to change their optimal bundle.

Since an individual chooses each consumption bundle that maximizes total utility. And the optimal consumption rule says that at the optimal consumption bundle the marginal utility per dollar spent on each good and service or the marginal utility of a good divided by its price is the same.Therfore, the consumer will chose a bundle that has more of food program than that of travel industry, consider the cost or price i.e. the wages are same.

1. Since we assume the market to have two good i.e. Food program and Travel industry and a smooth switch is observed between the two. Therefore the budget constraint i.e. the compounds of goods and services that a consumer may purchase given current prices within his given income, shifts or rotates on the axis where food program is taken. Because now the consumer's new optimal bundle is likely to have more of food program as compared to that of travel.

The graph below depicts the rotation where food program is assumed to be on the y-axis.

2. Consumer preference is defined as the idiosyncratic tastes of individual consumers, estimated by their satisfaction with those items subsequent they have acquired them. This satisfaction is often regarded to as utility. Consumer value can be ascertained by how consumer utility compares between different items. Here, in the question the case says that the travel industry has been laid off and the new program by government of 'food program' is gaining more attention. The consumers have an advantage in food program over the tourism industry. Thus the consumer's are likely to change their preference towards the new program by government. and the economy will observe a shift in taste and preference due to external forces.

3. The optimal condition in a budget constraint is when the budget line is equal to the indifference curve, between marginal rate of transformation and marginal rate of substitution. The graph below depicts the condition. Where point D is assumed to be the optimal point on the budget line, where to increase in the budget constraint and the consumer being on the highest indifference curve possible i.e. can consumer more than before. Thus causing an increase in the variable i.e. consumption. Since the question doesn't mention the meaning for the variables taken we assume,

Thus, as per the new optimum point the effects on the above variables are,

Variable	Effect
	Expands or increases in respect to food program
	No change
	No change