Jordon Case Study - Budget Constraint - Economics Assignment Help

Assignment Task :

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 maximising 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 maximising 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? 

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