Question

A person can choose to work any amount from 0 to 52 weeks per year at a wage of $1000 per week. (12 points)

For each of the scenarios below, indicate whether the proposed change will increase or decrease the number of weeks that this person will work, or if the effect is uncertain. Justify your answer by stating whether the change in the budget constraint leads to an income effect, a substitution effect, or both, and draw the new budget constraint. (2 points each)

1. The government implements a welfare program in which the welfare system pays $5000 per year to people with no labor market earnings, but benefits are reduced by $0.50 for each $1 in labor market earnings that a person receives.
2. The government adopts universal basic income where each person receives $5000 regardless of the amount of work.

Answer 1