Jody's market wage is $25 per hour. He is entitled to a disability payment of $300 per week. He has no other non-labor income

a.) Draw his budget constraint if he is entitled to the payment only if he does not work.

b.) Draw his budget constraint if he can keep the payment regardless of whether or not he works.

c.) Suppose that Jody can keep is disability benefit regardless of whether or not he works. But his labor income is subject to a progressive tax. There is no tax when his labor income is less than $1000. When his labor income is greater than or equal to $1000, but less than $2000 there is a tax of 20 % on that labor income. When his labor income is greater than or equal to $2000 there is a tax of 30 % on that labor income. This is similar to the progressive tax problem in our "Applications" but there is an additional kink here. Draw his budget constraint.

*d.) When a benefit is "means tested" the recipient receives only part of the benefit if his income beyond a certain threshold. That is, the benefit is taxed. When the rate at which it is taxed increased with income the means testing is progressive.

Here is an example. When Jody's labor income is less than $1000 he keeps the entire benefit. When his labor income is greater than or equal to $1000, and less than $2000 he gets only 80 % of the benefit. That is, the benefit is taxed at the rate of 20%. When his income is greater than or equal to $2000 he receives only 70%. That is, the benefit is taxed at the rate of 30%. Draw his budget constraint.

Indicate on all diagrams the points at which there may be bunching.