Suppose Bruce and Sandy are choosing how many hours to work this month. All else equal Bruce prefers hanging out at home. Sandy doesn't mind leisure time but enjoys the rewards of work more than Bruce. Both have a wage rate of $10 per hour. Assume they each have 80 hours to devote to working. Any money earned from working is spent on a consumption good, c.

a. Graph the budget constraint for Bruce and Sandy, labeling the x- and y-axis. Draw the indifference curves that may characterize the optimal choice of leisure and consumption for Bruce and Sandy. The government introduces a welfare program that pays a benefit of $150 per month to a person if they have 0 earnings. The benefit reduction rate is 50%. b. Draw the new budget line. Be sure to note the slope of each segment of the budget line and the income level at which the person no longer qualifies for welfare benefits. c. In the graph, depict how Bruce and Sandy are likely to respond to the introduction of welfare. Describe in words how the welfare program affects their choice of labor supply via income and substitution effects. d. Now suppose that the government alters the program to have a benefit reduction rate of 100%. Draw the new budget constraint.