Question

Assume the gross wage of w=$10 per hour and gross non-wage income YN = $5000 per...

Assume the gross wage of w=$10 per hour and gross non-wage income YN = $5000 per year. Assume a maximum of 6,000 hours of leisure per year (T= 6000 per year ), so that full income for the worker is $65,000.

Draw the budget constraint under each of the following taxes and transfer schemes.

1. A welfare program that pays $8,000 per year if the person does not work and reduces the welfare benefit dollar for dollar with earnings (100% benefit reduction rate). Assume that the individual does not have any other non-wage income (i.e., YN=0)

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Answer #1

We can calculate the consumption (which is equal to disposable income) at various level of leisure hours/ hour worked after welfare benefits given.

No. of hours worked, H Leisure hours, T Wage income, YW Welfare benefit Disposable income
0 6000 0 8000 8000
300 5700 3000 5000 8000
500 5500 5000 3000 8000
800 5200 8000 0 8000
1000 5000 10000 0 10000
1500 4500 15000 0 15000
2000 4000 20000 0 20000
2500 3500 25000 0 25000
3000 3000 30000 0 30000
3500 2500 35000 0 35000
4000 2000 40000 0 40000
4500 1500 45000 0 45000
5000 1000 50000 0 50000
5500 500 55000 0 55000
6000 0 60000 0 60000

We can build budget constraint with the help of above information


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