Question

Suppose a single parent can work up to 16 hours per day at a wage rate of $10.00 per hour. Various income maintenance programs have been developed to assure a minimum level of income for low-income families. Aid to Families with Dependent Children (AFDC) was established with the Social Security Act of 1935. The family was given an income subsidy depending on family size. Under this program, the family’s benefit was reduced by $1 for every dollar earned. Suppose the maximum subsidy for the single parent described above is $40.

a. Draw the daily budget constraint without program participation for the single parent described above.

b. On the same graph, draw the daily budget constraint under AFDC for the single parent described above.

c. What effect does this program have on the incentive to work? Explain.

Answer #1

a) Suppose that John can work up to 2,000 hours per year at a
wage of $10.00 per hour, that he has no other source of income, and
there is not yet TANF program in place. Draw his budget constraint
(name it Figure 1.1). Explain how you constructed the graph. What
is the slope of the budget constraint? Explain the slope.
(b) Now, let’s introduce a TANF program. Consider an income
guarantee program with an income guarantee of $5,000 and...

Lisa can gain 6 dollars per hour if
she goes to work. She has 16 hours of time in a day which can be
spent as leisure or labor. If she decides to go to work, she has to
get on to the Ferry which will cost her 8 dollars per day. Lisa can
gain 20 dollars as non-labor income daily
What is the graphic of Lisa’s consumption-leisure budget
constraint for a day(draw budget set).
b. If Lisa is not...

Ira’s only source of income is from working. He can work
as many hours per day as he wishes (up to a maximum of 24 hours) at
a fixed wage rate of $10 / hour.
a. Initially, assume that there is no income
tax.
Draw Ira’s budget constraint.
b. Now suppose, that the government introduces a tax
rate of 50 cents in the dollar. Suppose that leisure is a normal
good that tax ends up reducing Ira’s hours worked. Show...

Suppose you have 24
hours per day that you can allocate between leisure and
working.
(i)
Draw the budget constraint between
“leisure hours” on the horizontal axis and “wage income” on the
vertical when the wage rate is $40 per hour. Mark an optimum point
A that is meaningful. Draw a new budget constraint when the wage
rate falls to $30 per hour. Show a new optimum point B.
(ii)
On your indifference curve diagram,
decompose the effect of the...

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