In the city of Notchingham, each worker is paid a wage rate of $10 per hour. Notchingham administers its own unemployment benefit, which is structured as follows: If you are unemployed (that is, if you do not work at all), you get unemployment benefits (a transfer from the government) of $50 per day. As soon as you work for only one hour, the unemployment benefit is completely withdrawn. That is, there is a notch in the benefit system.
a. How much income does an unemployed person have per day? How much daily income does an individual who works four hours per day have? How many hours do you need to work to earn just the same as if you were unemployed?
b. Will anyone ever accept a part-time job that requires working four hours per day, rather than being unemployed?
c. Suppose that Notchingham now changes the way in which the unemployment benefit is withdrawn. For each additional dollar an individual earns, $0.50 of the unemployment benefit is withdrawn. How much daily income does an individual who works four hours per day now have? Is there an incentive now to work four hours per day rather than being unemployed?