please help ps2

ECO 4351 Prof. Millimet Problem Set #2 1. Explain the derivation of the Laer curve. In particular, when the Laer curve is upward sleping, what is the relative magnitude of the income and substitution effects? When it is downward sl0ping? If the IE dominates the SE, is the Laer curve always upward sleping? If the SE dominates the IE, is the Laer curve always downward leping? Explain. 2. Use our labor supply model to illustratel the impact of increasing the implicit tax rate t in the AFDC/TANF (welfare) program, from f = 0.67 to f = 1 on the labor supply of the following groups: (a) those pe0ple wmking zero h0urs (b) those peeple receiving some benets, but also working a few hours a week 3. If a welfare program entails a $3,000 basic benefit (to individuals with zero inc0me) and an implicit tax rate of t = 0.3, what will be the size of the income transfer (i.e., welfare check] received by a household which earns $2,000 per year? What will be the household's total income? What is the breakeven level of income implied by this program? 4. Consider the model of welfare discussed in class, where individuals are guaranteed at least a minimum income of i and there is an implicit tax, t, applied to earnings. (a) Graph an individual's budget constraint under the welfare program, assuming the individual has no other non-labor income and could potentially earn a wage, m, if he [she chooses to work. Be sure to label all aspects of the graph, including the slepes of the budget line segments, the axes, and the valan of income at the various 'kink' points on the budget line. (b) If the lump sum component of welfare is reduced (from 5 n- 37'} and the implicit tax is also reduced (from t r t'] such that the breakeven level of income remains unchanged, what is the effect on the time allocation of an individual initially working only a few hours? Be sure to discuss: the income and substitution effects. (c) If 5 = 100, t = 0.5, and 5' = 50, what must the new implicit tax rate, t', be such that the breakeven level is unchanged? 5. In the article by Moftt (2003}, he outline; four argument put forth by economists against incorpo- rating work requirements into welfare programs. What are they? 6. Moftt (2003) (a) He discusses a particular case where the altering the parameters of the welfare program, while leaving the breakeven level of income unchanged, unambiguously increases labor supply. What is this case? (b) He then argue that this is somewhat misleading. W'hy? (c) Finally, he discusses whether it is theoretically possible to alter the parameters of the welfare program, while leaving the aggregate welfare payouts by the government unchanged, such that labor supply will unambiguously increase. Explain his conclusion. 7. The following parameters are for the Earned Income Tax Credit in 1998: W base-In WW Children (to) Range Credit ({1} Range 0 7.65 0-4460 341 7.65 5570-10030 1 34 0-6680 2271 1 5.98 12260- 26473 (a) Graph the budget constraint for a woman with no children and a woman with one child on a single, neat graph, being sure to label all axes, lines, lepes, and income values where kink points exist. (b) What is the breakeven level of income for each type of woman? (c) Let's think about Mary. Mary is a single, childless woman who currently is working part-time, earning $4000 per year working, and taking advantage of her tax credit under the plan. If Mary has a child, but remains single and collects no child support from the father, will she adjust her labor supply? Be sure to explain the income and substitution effects. 8. Dene an individual's reservation wage? \"Other things being equal, a person's reservation wage increases as non-labor income increases\" Do you agree? Why or why not? 9. Explain the logic behind and the derivation of the backward-bending labor supply curve. 10. Evaluate the following claim in light of our labor supply model. \"When a married woman's husband gets a raise, she tends to work less. \"Then she gets a raise, she tends to work more." If the statement is true, how might this explain the pattern of observed labor force participation rates of men and women over the past few decades