Consider a low-income worker with standard indifference curves who has zero non-labor income (V = 0) and is working a job earning a wage for $10 per hour for40 hoursa week. The government wants to provide assistance to the worker while incentivizing the worker to stay employed. Policy A proposes to provide the worker with a lump-sum payment of $200 per work week. Policy B proposes to supplement the worker's income by $5 per hour (so that the worker now earns $15 per hour worked).

a. Draw a graph outlining the effect of Policy A. Does Policy A achieve the government's goal of incentivizing the worker to stay employed?

b. Draw a graph outlining the effect of Policy B. Does Policy B achieve the government's goal of incentivizing the worker to stay employed?

c. Suppose the government chooses Policy B and observes that the work hours of the low income worker decreases when the wage is increased. Which of the following statements is true?

i. The income and substitution effect moved in the same direction.

ii. The substitution effect dominated the income effect.

iii. The income effect dominated the substitution effect.

iv. The wage increase was accompanied by an increase in prices