Question 4: in the figure below, point A represents Gertrude\'s preferred bundle

Question

Question 4: in the figure below, point A represents Gertrude's preferred bundle of leisure and income. Her wage is $5 per hour Y (per day) 120 L (per day) 24 4.a) How many hours is she working? What is her income? 4.b) Now suppose the government puts in place an income maintenance program where every citizen is entitled to a minimum daily income of $40, and where each dollar of labor earnings reduces the government handout by a dollar i. If Gertrude does not work, how large is the handout she will receive from the ii. If she works for 4 hours, how large is the handout she will receive and her total ii. If she works for 8 hours, how large is the handout she will receive and her total iv. If she works for 12 hours, how large is the handout she will receive and her total 4.c) Draw Gertrude's new budget constraint after the income maintenance program is put in government? income? income? income? place. 4.d) Find the new bundle she prefers with the income maintenance program and label it B. Draw the indifference curve on which B sits and label it IC2. Based on where you drew B, is Gertrude working more or less?

Explanation / Answer

4

ii) For Gertrude to earn $40 and given the wage rate and hours worked . Handout = 40 – 5*4 = $20.

iii) Given hours worked = 8 hours. Handout = 40-8*5 = 0.

iv) Handout will be zero because she is earning more than $40

*For solution to other parts please post as a separate question. Supposed to do only four sub-parts.  

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