Question

Suppose that the BC government must decide which income supplement program to implement to assist low-income families. One program is to pay a $24 per day to families with a daily income of $120 or less. The other program is to pay 20% of wage income to families with a daily income of $120 or less.

The latest census suggests that a typical low-income family work 10 hours per day at hourly wage of $10. If you were a policy advisor to the government, which program would you recommend? With the use of an appropriate diagram, explain your answer.

Answer 1

Low income family works 10 hours at wage rate of $10 per hours.

They earn 10 * 10 = $100 in a day

Program which pays $24 with income of $120 or less will make their earning $100 + $24 = $124

Program which pays 20% wage income with daily income of $120 or less will make their earning $100 + $20 = $120

Thus to support family with low income, I would recommend policy which pays $24 with income of $120 or less as it makes their income higher such that they can consume more goods.

Initial budget constraint is line AB.

Program with $24 in assistance makes the budget line EF while proram with 20% wage income makes budget line CD.

As EF is rightward as upward than CD, EF would be preferred where IC curve is also at its highest.