The following figure gives two daily budget constraints for a low-income individual.

One budget line is the one in which the individual, who can work up to 16 hours per day, receives no subsidy from the government. The other budget line represents participation in an income maintenance program that offers a nowork benefit and phases out this subsidy as earnings increase.

a. What is the individual’s wage rate without program participation?

b. What is the program’s no-work benefit?
What is the effective wage rate when participating in the program?

c. If, absent the subsidy program, the individual had chosen to work less than 8 hours per day, would she be better off participating in the program or not participating?
If the individual had chosen to work more than 8 hours per day, would she be better off participating in the program or not participating?

d. What will be the labor supply response for an individual who had chosen to work 8 hours before the program is implemented and now qualifies for the program?

Transcribed Image Text:

Income (dollars) 180 160 140 120 100 80 60 40 20 0 T 0 LO 5 10 Leisure (hours) 15 20 budget line without program budget line with program work 8 hours