Question

Using indifference curve analysis:

Indicate whether you think labor supply would increase, not change at all, or change in an uncertain direction as a result of the policy change. Make sure your diagaram is consistent with your conclusion.

A) A decrease in social security benefits for elderly persons.

B) A decrease in the tax rate of welfare recipients from 100% to 50%

C) Instituting a work requirement for welfare recipients, without any change in the welfare tax rate.

D) Instituting a training program that leads to an increase in the wage rate of unskilled workers

Answer 1

In economics, an indifference curve connects points on a graph showing different quantities of two goods, points between which a consumer is indifferent. ... It means that an indifference curve is the locus of various points showing different combinations of two goods giving equal utility to the consumer.

A)

Unfortunately, more than 2 in 10 married couples and 43% of single seniors depend on Social Security to give 90% or more of their income. This is because these seniors may be just above the poverty level, they may be not be eligible for programs like food stamps, which could help them to survive with scarce monthly funds coming in.

On low fixed incomes, many will also struggle strongly to afford the costs of medical care, specially with mean healthcare expenditures summing almost $6,000 yearly for seniors 65 and over in 2016 -- around 39% to 47% of the average annual Social Security benefit for a single senior.

B.

If the sellers can cut down on the tax to 50% to the consumers, the price of X will fall by the amount of the tax, and the x-intercept of the budget line will increase from OB1 to OB, and the post-tax budget line would become A1B₁.

The consumer’s equilibrium before the imposition of the tax was at the point of tangency C between the budget line AB and one of his indifference curves (ICs), IC₃, and now it would be at the point of D where the post-tax budget line AB₁ has touched IC₁ which is a lower curve than IC₃.

Thus, because of the decrease of the excise tax, the consum­er’s utility level has improved. This is what is expected, because the reduction of the tax has caused a decrease in the price of one of the two goods, viz., X, that the consumer buys.

C.Indiffernce does not change as there is no change in the welfare tax

D.Indiffernce curve will shift to right as the preferences of the labor change due to rise in wages and disposable income. They start using next level of goods and normal goods for them now become inferior.Also utility rises.