1. Consider the following poverty program. Under this plan, each person who earns less than $30,000 is given a fixed payment of $10,000.

All persons who earn more than $30,000 receive nothing. This plan differs from the ones discussed in class in that there is no phaseout

range; instead, the benefit simply disappears at an income of $30,000.

Now consider a person initially earning $20,000 before the plan is introduced. Which of the following is true after the plan is

introduced?

a.

the substitution effect will reduce time spent working ; there is no income effect

b.

both the substitution effect and the income effect will reduce time spent working

c.

the income effect will reduce time spent working ; there is no substitution effect

d.

there is no substitution effect and there is no income effect