Suppose that in country X , university students get a monthly welfare support of AC300 as a support for enrollment into tertiary education. In addition to this welfare support, students are allowed to work (tax-free), conditionally on their income being lower or equal to AC700. If they earn more than AC700, they lose the welfare support. Assume that each student can potentially work (or consume leisure) for the maximum of 120 hours per month, and that the price of consumption is 1.

(a) Barbora faces a wage rate of AC8. Can you imagine a situation where she gives up the welfare payment? Does the welfare program provide incentives not to work or work less in her case?

(b) Tereza faces a wage rate of AC14. Can you imagine a situation where she gives up the welfare payment? Does the welfare program provide incentives not to work or work less in her case?

Support your answers graphically (draw a separate graph for each student).

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a The welfare program offers ... View the full answer