KEY QUESTION The following table contains three hypothetical public assistance plans:

Plan 1 Earned Income Transfer Payment Total Income

$ 0 $4000 $ 4000 2000 3000 5000 4000 2000 6000 6000 1000 7000 Plan 2 Earned Income Transfer Payment Total Income

$ 0 $4000 $ 4000 4000 3000 7000 8000 2000 10,000 12,000 1000 13,000 Plan 3 Earned Income Transfer Payment Total Income

$ 0 $8000 $ 8000 4000 6000 10,000 8000 4000 12,000 12,000 2000 14,000

a. Determine the minimum income, the benefit-reduction rate, and the break-even income for each plan.

b. Which plan is the most costly? The least costly? Which plan is the most effective in reducing poverty? The least effective? Which plan contains the strongest disincentive to work? The strongest incentive to work?

c. Use your answers in part b to explain the following statement: “The dilemma of public assistance is that you cannot bring families up to the poverty level and simultaneously preserve work incentives (without work requirements) and minimize program costs.”