Consider an income guarantee program with an income guarantee of $5,000 and a benefit reduction rate of 40%. A person can work up to 2,000 hours per year at $10 per hour.
1. Draw the person’s budget constraint with the income guarantee. Be sure to place appropriate labels similar to those found in the slides/lecture.
2. Suppose that the income guarantee rises to $7,500 but with a 60% reduction rate. Draw the new budget constraint. Make sure it is visible.
3. Which of these two income guarantee programs is more likely to discourage work? Explain briefly.