Question 4

An income maintenance system is such that a person receives a benefit of 100 per week, which is reduced if the persons income, Z, is above 200 at a rate of 40 percent (so that the benefit in this range is:

100 0.4 (Z 200), falling to 0 at Z = 450.

a. Draw the after-benefit budget constraint.

b. Suppose that individuals have identical Cobb-Douglas utility functions given by:

U = 1/3 logY + 2/3 log (24 L)

and have no income apart from earnings. Draw a diagram with the wage rate on the vertical axis and labor supply on the horizontal axis that shows the labor supply curve.