Consider an income guarantee program with an income guarantee of $5,000 and a benefit reduction rate of 40%. A person can work up to 2,000 hours per year at $10 per hour.

a. Draw the person’s budget constraint with the income guarantee.

b. Suppose that the income guarantee rises to $7,500 but with a 60% reduction rate. Draw the new budget constraint.

c. Which of these two income guarantee programs is more likely to discourage work? Explain.

d. Draw a system of smooth indifference curves that bend the right way but would lead an agent to work more under the program you chose in part (c) than under the other program.

Describe what seems extreme about these curves that leads to the unusual behavior.