Consider your decision about how many hours to work.

a. Draw your budget constraint assuming that you pay no taxes and receive no subsidies. On the same diagram, draw another budget constraint assuming a five dollar per hour of work subsidy from the government (that is, for each hour that you work, in addition to the wage from your employer, you receive five dollars from the government). Assume this subsidy does not affect your wage.

b. In a separate graph, show how the subsidy might lead to more hours of work. Diagram the substitution and income effects of the subsidy, assuming the net effect of the subsidy is more hours worked. Which effect is larger in magnitude, the substitution effect or the income effect?

c. In a third graph, show how the subsidy might lead to fewer hours of work. Diagram the substitution and income effects of the subsidy, assuming the net effect of the subsidy is fewer hours worked. Which effect is larger in magnitude, the substitution effect or the income effect?