5. (R & G) Suppose that the government introduces an income maintenance program for low- income...

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5. (R & G) Suppose that the government introduces an income maintenance program for low- income people that offers a basic grant of 200 per month, but that for any earnings above 100, the grant is reduced one for one (that is, the marginal tax rate is 100 percent). (a) Assume that A can earn 10 per hour and has no other income. Sketch his monthly budget constraint with and without the program in effect. Carefully label intercepts and all kink points. At how many hours of work is the grant reduced to zero? (b) According to economic theory, what would happen to A's hours worked and total income if the government instituted this welfare program? (c) Suppose that the government decides to keep the monthly base grant at 200, but to lower the implicit marginal tax rate on earnings to 66.67 percents. Draw the new budget constraint. (d) Relative to the first plan, how will introduction of the new plan affect A's hours of work and total income? 5. (R & G) Suppose that the government introduces an income maintenance program for low- income people that offers a basic grant of 200 per month, but that for any earnings above 100, the grant is reduced one for one (that is, the marginal tax rate is 100 percent). (a) Assume that A can earn 10 per hour and has no other income. Sketch his monthly budget constraint with and without the program in effect. Carefully label intercepts and all kink points. At how many hours of work is the grant reduced to zero? (b) According to economic theory, what would happen to A's hours worked and total income if the government instituted this welfare program? (c) Suppose that the government decides to keep the monthly base grant at 200, but to lower the implicit marginal tax rate on earnings to 66.67 percents. Draw the new budget constraint. (d) Relative to the first plan, how will introduction of the new plan affect A's hours of work and total income?