All persons who earn less than $20,000 are given a wage subsidy of $0.50 for each dollar worked. The maximum benefit is therefore $10,000.

All persons who earn between $20,000 and $30,000 are paid the maximum benefit of $10,000. This is the income disregard region.

The phaseout occurs in the income range from $30,000 to $50,000. In this range the maximum benefit $10,000 is cut by $0.50 for each dollar earned. For example, a person who earns $30,001 will get paid $10,000 -$0.50 = $9,999.50. At an income of $50,000 the program has been totally phased out.

Now focus on a person initially working and earning $15,000 before the plan is introduced.

Consider the impact of the substitution effect (note that in this question we are not talking about the income effect!). Which of the following is true?

a.

the substitution effect will raise time working

b.

the substitution effect will lower time spent working

c.

there is no substitution effect in this income range

d.

the substitution effect may raise or lower time spent working