nts) Joe has $200 of non-labor income, and can earn a wage rate of $10 per hour
ID: 1132333 • Letter: N
Question
nts) Joe has $200 of non-labor income, and can earn a wage rate of $10 per hour working. There are 168 total hours in a week for Joe to allocate between labor and leisure. Joe's pref- for consumption) and leisure can be expressed as the following 4. (12 poi erences for income (to be used utility function, where Y represents dollars and L represents hours of leisure. U(Y,L) (Y -20) (L-10) This utility function implies the following marginal utilities: Joe's marginal utility of leisure is (Y -20). 1 Joe's marginal utility of income is (L-10). (a) Sketch Joe's budget line. Label each axis, all intercepts, and the slope. (b) Ca Iculate Joe's marginal rate of substitution of leisure for income if he has $600 of income and 128 income and leisure hours? Briefly explain why or why not. hours of leisure this week. Is he maximizing his utility at this choice of income (c) Calculate Joe's reservation wage. Is it optimal for Joe to participate in the labor force at the (d) Solve for Joe's optimal quantity of income, hours of leisure, and hours of work per week. current wage rate of $10 per hour? Briefly explain why or why not. Label this optimal point and draw the appropriate indifference curve in your sketch from part (a). 6 points) Suppose an income maintenance program offers $800 basic benefit per month, with a benefit reduction rate of 0.40. (a) What will be the size of the monthly subsidy received by a family that earns $1.200 of income per month? (b) What will be this family's total income per month? (c) What break-even level of income does this program imply? 6. (4 points) In economic terms, clearly explain how an income maintenance program like the one described in problem (5) both reduces labor force participation rates and hours worked for the population as a whole.Explanation / Answer
Q5]
Basic benefit (income guarantee) = $800
Benefit-reduction rate = 0.40=40%
If a family has an earned income of $3000 per year, its subsidy payment will be
Subsidy= basic benefit-basic reduction rate *wage rate
$800-0.40 x $1200=$320
Family’s total income= subsidy +wage rate=$320+$1200=$1520
The break-even level of income is
When condition
Basic benefit=basic reduction rate *wage rate is fulfilled i.e. subsidy =0
$800=0.40 x income
Break-even Income= $2000
Q6]
Income maintenance program reduces labor force participation rates and hours worked by —
It occurs as there is change in the behavior of people in response to insurance. Cash transfer programs Insure people against having low income.
This can cause more people to choose to have low incomes. This disincentives more hours of work, as income for working for more number of hours remains same.
Unskilled workers get trapped out of the labor force or they join some underground economy.
Since cash transfers consist of money transfers not subject to any use restraints, this further motivates people to not to work as using this money they can buy basic needs items essentially required to survive.
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