Use the data from Problem 1 to plot the worker's daily money income-leisure trade-off line. To do so, calculate her daily pension and assume 150 working hours in a month. Assume that the worker is allowed to earn $8,000 per year before her Social Security benefits are reduced by $1 for each $3 of labor earnings.
Show how it is possible for the retiree to be indifferent between not working at all and working enough to give up all her Social Security benefits.

Problem 1

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A middle-income worker with a dependent spouse older than the normal retirement age retired in January 2004. In the year prior to retirement, her gross monthly earnings are S1,500. Her Social Security pension benefit is $1,000 per month. Prior to retirement, she was subject to total taxes on her labor earnings amounting to 20 percent. Calculate her gross and net replacement rates. Suppose the cash value of Medicare subsidies that she expects to receive during retirement amount to S2,000 per year. Recalculate the replacement rates, including the Medicare benefits.