Question

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 a benefit reduction rate of 40%. Illustrate graphically what the TANF program does to John’s budget constraint from question (a). Name the graph as Figure 1.2. Explain how you constructed the graph. Note that you should also draw John’s budget constraint before the TANF program was introduced (i.e. Figure 1.1) (you may use different colors). Explain the Figure 1.2. Explain the slope(s).

(c) Suppose that the income guarantee rises to $7,500 but with a 60% reduction rate. Draw the third budget constraint; name the graph as Figure 1.3. Explain how you constructed the graph. (Note that Figure 1.3. should include John’s budget constraints from (a) and (b) problems, i.e. draw all three budget constraints on Figure 1.3). (You may use different colors). Explain the Figure 1.3. Explain the slope(s).

(d) Which of these two income guarantee programs is more likely to discourage John from working? Explain

Answer 1