Describe advantages and disadvantages of categorical welfare relative to the cash welfare system. What rule should guide the government as it decides what the appropriate categories are to use in designing these programs; that is, which types of categorical definitions will minimize the distortions from the system (e.g., single motherhood, blindness, etc.)? Do you know of empirical evidence on the question of whether categories used to establish welfare eligibility affect behavior? 

2) Imagine that you are designing a means-tested cash transfer program to combat poverty. That is, you are choosing a guaranteed benefit level and an implicit tax rate (benefit reduction rate) at which this grant will be taken away as income rises. What are the efficiency and equity implications of choosing different grant levels and different tax rates?