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.
Draw original budget constraint (with a $500 DI benefit) and the budget constraint under alternative A.