Question

An individual can earn $12 per hour if he or she works. There are 30 days per month. Draw the budget constraints that show the monthly consumption-leisure trade-off under the following three welfare programs: a. The government guarantees $600 per month in income and reduces that benefit by $1 for each $1 of labor income. b. The government guarantees $300 per month in income and reduces that benefit by $1 for every $3 of labor income. c. The government guarantees $900 per month in income and reduces that benefit by $1 for every $2 in labor income, until the benefit reaches $300 per month. After that point, the government does not reduce the benefit at all.

Answer 1

Answer :-

a) Assume that, in each graph a person can work at most 24 hours per day times 30 per month for 12 months.
(a) The government guarantees $600 per month in income and reduces the benefit by $1 for each $1 of labor income. The equivalent of $600 of income is 50 hours of labor (at the $12 wage) or 720 - 50 = 670 hours of leisure.

b) The government guarantees $300 per month in income and reduces that benefit by $1 for every $3 of labor income.
So, the equivalent of $300 of income is 25 hours of labor or 695 hours of leisure. The entire $300 guarantee would be rejected after the recipient earned $900 or worked 900/12 = 75 hours,
that yields 720 - 75 = 645 hours of leisure.

c) The government guarantees $900 per month in income and reduces that benefit by $1 for every $2 in labor income, until the benefit reaches $300 per month. After that point, the government does not decline the benefit at all. This program yields a wage rate of $6 per hour up to 100 hours of work per month. The reduction ends after $600 is deducted, which occurs at 100 hours per month (100 x 6 = $600).
and wages are 100 x $12 = $1, 200, plus benefits of $300, for total consumption of $1, 500 and 720 - 100 = 620 hours of leisure.
At greater than 100 hours, the new budget line parallels the baseline $12 per hour line but is $300 higher. So, lastly, the new y- intercept is

$8, (640 + $300) = $8, 940.