2. A person can choose to work any amount from 0 to 52 weeks per year...

  

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2. A person can choose to work any amount from 0 to 52 weeks per year at a wage of $1000 per week. (10 points) a. Draw her annual budget constraint, representing total annual consumption versus annual weeks of leisure. (2 points) For each of the scenarios below, indicate whether the proposed change will increase or decrease the number of weeks that this person will work, or if the effect is uncertain. Justify your answer by stating whether the change in the budget constraint leads to an income effect, a substitution effect, or both, and draw the new budget constraint. (2 points each) b. The government implements a welfare program in which the welfare system pays $5000 per year to people with no labor market earnings, but benefits are reduced by $1 for each $1 in labor market earnings that a person receives (so that people who earn over $5000 per year do not receive any welfare benefits). c. The government implements a welfare program in which the welfare system pays $5000 per year to people with no labor market earnings, but benefits are reduced by $0.50 for each $1 in labor market earnings that a person receives. d. Now consider the Earned Income Tax Credit (EITC) for a family with two kids (the following will be approximation amounts based on the 2018 EITC). Under this program there is a phase-in period in which individuals receive a 40% wage subsidy on earning up to $15,000. Individuals receive this maximum benefit in this plateau region until labor market earnings hit $19,000. For all earning after $19,000, the benefit is drawn down throughout the phase-out region at a rate of 20% until it is depleted. Graph the budget constraint making sure to indicate the maximum benefit received and the earnings level at which the EITC benefit falls to zero. 2. A person can choose to work any amount from 0 to 52 weeks per year at a wage of $1000 per week. (10 points) a. Draw her annual budget constraint, representing total annual consumption versus annual weeks of leisure. (2 points) For each of the scenarios below, indicate whether the proposed change will increase or decrease the number of weeks that this person will work, or if the effect is uncertain. Justify your answer by stating whether the change in the budget constraint leads to an income effect, a substitution effect, or both, and draw the new budget constraint. (2 points each) b. The government implements a welfare program in which the welfare system pays $5000 per year to people with no labor market earnings, but benefits are reduced by $1 for each $1 in labor market earnings that a person receives (so that people who earn over $5000 per year do not receive any welfare benefits). c. The government implements a welfare program in which the welfare system pays $5000 per year to people with no labor market earnings, but benefits are reduced by $0.50 for each $1 in labor market earnings that a person receives. d. Now consider the Earned Income Tax Credit (EITC) for a family with two kids (the following will be approximation amounts based on the 2018 EITC). Under this program there is a phase-in period in which individuals receive a 40% wage subsidy on earning up to $15,000. Individuals receive this maximum benefit in this plateau region until labor market earnings hit $19,000. For all earning after $19,000, the benefit is drawn down throughout the phase-out region at a rate of 20% until it is depleted. Graph the budget constraint making sure to indicate the maximum benefit received and the earnings level at which the EITC benefit falls to zero.

Answer rating: 100% (QA)

Solution A person can choose between work and leisure given the constraint of total 52 weeks in a ye... View the full answer