Consider an income guarantee program with an income guarantee of $5,000 and a benefit reduction rate...

Consider an income guarantee program with an income guarantee of $5,000 and a benefit reduction rate (phase-out rate) of 40%. A person can work up to 2,000 hours per year at $10 per hour. (a) Draw the person’s budget constraint with the income guarantee. (b) Suppose that the income guarantee rises to $7,500 but with a 60% benefit reduction rate. Draw the new budget constraint. (c) Which of these two income guarantee programs is more likely to discourage work? Explain. (d) Draw a system of smooth indifference curves that bend the right way (i.e. bent towards the origin in the normal way we draw them in class) but would lead an agent to work more under the program you said would discourage work in part (c) than in the other program. Describe what seems extreme about these curves that lead to unusual behavior.

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Expert Solution

Leisure is inferior good and as income rises the consumes less of the same.

Rahul Sunny answered 1 year ago

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