Consider an individual who lives in an economy without a welfare program. They initially work T-L0hours per week, where (T-L0)>0. They earn an hourly wage (W) and no non-labour income. a) Draw a graph that reflects this individual’s income-leisure constraint, utility-maximizing indifference curve (U0), choice of leisure hours (L0) and income (Y0). b) Now, assume that a welfare program has been implemented in this economy. The welfare benefit is smaller than the individual's initial income level (Y0) and there is a
Consider an individual who lives in an economy without a welfare program. They initially work T-L0hours per week, where (T-L0)>0. They earn an hourly wage (W) and no non-labour income.
a) Draw a graph that reflects this individual’s income-leisure constraint, utility-maximizing indifference curve (U0), choice of leisure hours (L0) and income (Y0).
b) Now, assume that a welfare program has been implemented in this economy. The welfare benefit is smaller than the individual's initial income level (Y0) and there is a 50% clawback on any labour income earned. The individual now maximizes their utility by working and collecting a partial welfare benefit.
On the same graph as part a, draw this individual’s new income-leisure constraint, utility-maximizing indifference curve (U1), choice of leisure hours (L1) and income (Y1).
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