Elizabeth’s wage rate is $5 per hour. She faces a welfare system that pays a monthly benefit of $150. The benefit is reduced by 25 cents for each dollar of earnings.
a. Sketch the budget constraint in a leisure/income diagram. How many hours does she have to work before her benefit is reduced to zero?
b. Sketch a set of indifference curves consistent with Elizabeth’s participation in the labour market and her 60 hours of work. What is her monthly welfare benefit?
c. Draw your diagram for part (a) again, and now sketch a set of indifference curves consistent with Elizabeth not participating in the market.
d. Suppose the government introduces a workfare program that requires welfare recipients to work 100 hours per month. If welfare recipients work 100 hours they keep their earnings and receive $100 in benefits. The welfare benefits are reduced by 25 cents for each dollar of earnings after the recipient works 100 hours. Draw Elizabeth’s budget constraint with the workfare program.
e. Is Elizabeth better off under the workfare program than she was under the welfare program?