Consider the conventional welfare program where benefits are reduced at 100 percent for every dollar earned (ie, br = 100%). For simplicity, assume that the earnings exemption is zero in all parts of this question. Market wage is w and nonlabour income is zero (y=0). Basic benefit is $B.

a. Briefly explain how the introduction of this program affects employment and hours of work.

b. Briefly suggest three changes that can be made to this program to motivate more employment

There is a belief that a 100 percent benefit reduction rate decreases employment motives which puts more people on welfare, but if it is reduced to 50 percent, welfare participation decreases.

c. Draw the graph for both cases (ie, when br = 100% and br = 50%). Label both axes.
d. Briefly discuss the (a) employment, (b) work hours and (c) welfare participation effects of reducing br from 100 to 50 percent.