Supply of labor 3. Suppose our welfare system was structured initially as follows: all people earning...

Supply of labor

3. Suppose our welfare system was structured initially as follows: all people earning below income $ X would be given a cash grant to bring their income up to $ X.

Draw a graph showing the budget constraint for this program. Next, suppose we changed the welfare system to incorporate a work test: persons who work fewer than y hours get no welfare payment at all. Above Y hours of work, people receive a welfare payment sufficient to bring up their income to $ X. Draw in the relevant budget constraint on your graph. Which system has stronger work incentives? Why?

Expert Solution

Rahul Sunny answered 2 years ago

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