Question

Mary is a single mother, with $250 in nonlabor income per week, and she can earn $15 per hour working between 0 and 60 hours per week. If Mary decides to work, then she will neeed to pay high-quality day care, which costs a fixed $150 per week. Now suppose a welfare program is put in place to subsidize the cost of day care for single mothers working at least 20 hours per week. Suppose that as long as the single mother works less than 40 hours, the full $150 cost is reimbursed. For those work more than 40 hours per week, the $150 rebate is reduced by $7.5 for every additional $15 earned (i.e. every additional hour worked), so that it is completely phased out for those work 60 hours. Draw a diagram that reflects the budget line with this new program in place. (Don't worry about being exactly proportional, just capture the main features of the program, i.e. intercept, slope, and kinked points if any.)

Answer 1

The budget line is plotted with the kinked points and all the line equations are expressed in the format y = mx+c.

Kinked points are those points where the equation of the budget line changes. This is contributed by the rebate function in the example.