Question

Consider an income guarantee program with an income guarantee of $5,000 and a benefit reduction rate of 40%. A person can work up to 2,000 hours per year at $10 per hour.

1. Draw the person’s budget constraint with the income guarantee. Be sure to place appropriate labels similar to those found in the slides/lecture. (5 pts.)

2. Suppose that the income guarantee rises to $7,500 but with a 60% reduction rate. Draw the new budget constraint. Make sure it is visible. (10 pts.)

3. Which of these two income guarantee programs is more likely to discourage work? Explain briefly. (5 pts.)

4. Draw a system of smooth indifference curves that bend the right way but would lead an agent to work more under the program you chose in (3) than under the other program. Describe what seems extreme about the curves that leads to the unusual behavior.

Answer 1