Question

Consider an income guarantee program with an income guarantee of $3,000 and a benefit reduction rate of 50%. (The benefit is reduced by $0.50 for every dollar of labor income.) A person can work up to 2,000 hours per year at $6 per hour. Person A, Person B, and Person C work for 100, 333 1/3, and 400 hours, respectively, under this program.

a. Draw the budget constraint facing any worker under the original program

b. Suppose the benefit is reduced by $0.40 for every dollar of labor income. Draw the budget constraint facing any worker under the proposed program.

c. Bonus (+5): Which of the four workers do you expect to work more under the new program? Who do you expect to work less? Are there any workers for whom you cannot tell if they will work more or less? Explain your answer by discussing how the direction of the income and substitution effects

Answer 1