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(solution) 1. Suppose that currently the government provides everyone with a


  • 1. Suppose that currently the government provides everyone with a guaranteed income

of $12,000 per year, but this benefit level is reduced by $1 for each $1 of work income.

The government is considering changing this policy so that the benefit level is reduced

by $1 for every $2 of work income. What effect would this policy have on work

effort?  Explain your answer and include a graph depicting the two scenarios.

                                                                                

  • 2.An individual can earn $12 per hour if he or she works. Draw the budget constraints

that show the monthly consumption?leisure trade-off under the following three welfare

programs.

  • The government guarantees $600 per month in income and reduces the benefit by

$1 for each $1 of labor income.

  • The government guarantees $300 per month in income and reduces that benefit by

$1 for every $3 of labor income.

  • 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.

3.  The Earned Income Tax Credit (EITC) provides a cash subsidy for every $1 earned by

those with incomes below $33,700 per year.

  •  How might the EITC raise an individual?s overall work effort? How might the EITC lower an individual?s work effort?

  •  Why does the EITC exacerbate the marriage penalty for low-in-come workers? Suggest

an alternative method of calculating the EITC that reduces this penalty.


4. Jackie spends her money on food and all other goods. Right now, she has an income

of $600 per month. Compare two alternative welfare programs in which she could participate:

program A would provide her with a monthly check of $300 and program B

would provide her with $400 a month in credits that can be spent only on food.

Draw Jackie?s budget constraints in each of these two cases.Jackie prefers program A to program B.Jackie prefers program B to program A.

Jackie is indifferent between the two programs.

 


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