4. Your country has a cash safety net program, welfare that provides eligible families who don't work at all with an welfare benefit of G=1000, and then taxes away that income at a rate of 30%. Assume full time work is 2000 hours a year.

a. Label the X and Y axes on the graph below and draw the budget set with the welfare program. Place the following types of individuals on the budget set and draw their indifference curves. 1) individuals who don't work under the program, 2) who work but get some welfare, and 3) who don't get any welfare, all for for a wage w = 2.

b. The dictator of your country decides this program is too generous, and allows people to buy goods like alcohol, cigarettes, and other non-necessary goods. He converts this program to one like the current US Food Stamp Program. The guarantee is the same, and the BRR the same, but the benefit can only be used to purchase unprepared foods. Draw 2 graphs, one showing the tradeoff between food and other consumption under the old cash program and the second showing the tradeoff between food and other consumption under the new food stamp program.

c. Is anyone worse off under the new food program? Draw their indifference curve. Is anyone left unaffected? Draw their indifference curve.

d. The dictator is worried that the program is including too many people. He makes a change. Under the new program, there is a low BRR of 30% for those with very low hours of work (hours of work less than or equal to 150), but the BRR increases to 100% later (hours of work above 150 but less than the breakeven). Draw the budget set for this new program on the graph on the next page for those with a wage of $2. Draw the indifference curves and old and new locations for the following people. 1) Those not working under the old program. 2) Those working less than 150 hours under the old program. 3) Those working 150 hours or mroe under the old program but below the new breakeven point. 4) Those working with hours between the breakeven points of the old and new programs. 5) Those at the old breakeven. And, 6), those with hours well above the new breakeven. Discuss why people end up where they are (hint: income and substitution effects)