8) Can this program have no effect on labor supply? If yes show how graphically. h) Can this program decrease labor supply? (Hint some current workers are eligible for DI but choose to work instead) Explain how it possible or impossible. If possible show how graphically.

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3. Assume the average worker has 100 hours of leisure and could earn $10 an hour. Suppose the
Social Security disability insurance (DI) program was structured so that
otherwise eligible recipients lost their entire disability benefit if they had any labor
market earnings at all. Suppose, too, that Congress was concerned about the work
disincentives inherent in this program, and that the relevant committee was studying two
alternatives for increasing work incentives among those disabled enough to qualify for it.
Alternative A was to reduce the benefits paid to all DI recipients (from $500 to $300) but make
no other changes in the program.
a) Draw original budget constraint (with a $500 DI benefit) and the budget constraint under
alternative A.
b) Can this program increase labor supply? Explain how it possible or impossible. If yes show
how graphically.
c) Can this program have no effect on labor supply? If yes show how graphically.
d) Can this program decrease labor supply? Explain how it possible or impossible. If yes show
how graphically.
The other (alternative B) for reforming the disability system is to maintain the old benefit levels
(for those who receive them) but allow workers to earn up to $300 a month and still keep their
benefits. Those who earn over $300 per month would lose all DI benefits.
e) Draw the original budget constraint and the budget constraint under alternative B.
f) Can this program increase labor supply? Explain how it possible or impossible. If possible
show how graphically.
8) Can this program have no effect on labor supply? If yes show how graphically.
h) Can this program decrease labor supply? (Hint some current workers are eligible for DI but
choose to work instead) Explain how it possible or impossible. If possible show how graphically.
Transcribed Image Text:3. Assume the average worker has 100 hours of leisure and could earn $10 an hour. Suppose the Social Security disability insurance (DI) program was structured so that otherwise eligible recipients lost their entire disability benefit if they had any labor market earnings at all. Suppose, too, that Congress was concerned about the work disincentives inherent in this program, and that the relevant committee was studying two alternatives for increasing work incentives among those disabled enough to qualify for it. Alternative A was to reduce the benefits paid to all DI recipients (from $500 to $300) but make no other changes in the program. a) Draw original budget constraint (with a $500 DI benefit) and the budget constraint under alternative A. b) Can this program increase labor supply? Explain how it possible or impossible. If yes show how graphically. c) Can this program have no effect on labor supply? If yes show how graphically. d) Can this program decrease labor supply? Explain how it possible or impossible. If yes show how graphically. The other (alternative B) for reforming the disability system is to maintain the old benefit levels (for those who receive them) but allow workers to earn up to $300 a month and still keep their benefits. Those who earn over $300 per month would lose all DI benefits. e) Draw the original budget constraint and the budget constraint under alternative B. f) Can this program increase labor supply? Explain how it possible or impossible. If possible show how graphically. 8) Can this program have no effect on labor supply? If yes show how graphically. h) Can this program decrease labor supply? (Hint some current workers are eligible for DI but choose to work instead) Explain how it possible or impossible. If possible show how graphically.
Expert Solution
Step 1-initial analysis of the question

the social security disability insurance(DI) program was restructured so that the disabled could get disability benefits if they were not able to get any job or they don't earn any labour wages. Accordingly they were paid $500 but a condition that if they are employed and start earning any benefit out of their labour work then their DI benefit of $500 would be immediately cancelled out.

Economics homework question answer, step 1, image 1

Here a disabled has a choice between 100 hours of labour or 100 hours of leisure. If a person chooses 100 hours of leisure then he would get DI benefit of $500. But if the disabled even chooses to work for even 1 hour then he gains $10 but losses $500 of DI benefit. So, naturally the disabled has to work for 50 hours to gain as much as what a disabled without work gains.

Here the congress being concerned about the disabled and the work disincentives in this program, the relevant committee proposed two alternatives:-

alternative A:-reduction of DI benefit from $500 to $300

Alternative B:- if a disabled doesn't works then he gains $500. But if a disabled works then he gains $300 with a condition that he should not earn more than $300 as labour benefits.

Here alternative B provides a better plan whereby if a disabled worker works for 30 hours then he/she gains $300 as labour benefits and in addition to $300 as DI benefit. The total earning here is $600 as against the unemployed disabled who is earning $500.

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