Individuals with $20,000 above in earned income reduces welfare payments at a rate of $0.50 reduction per $1 of earned income over $20,000.

1. Draw an indifference curves diagram showing an individual who would increase their hours worked with this policy, compared to Welfare Policy #1. Explain the diagram.

2. Show how an increase in a person's wage rate can move them from being on welfare to not being on welfare. [A higher wage rate will produce a steeper budget constraint.] Explain the diagram.