Consider how the labor leisure tradeoff diagram changes when Medicaid is offered to individuals whose income is below a defined threshold, I. Note that Medicaid is an in-kind transfer equal to pM, where p is the price of medical care and M is the quantity of medical care transferred.
a. Draw the budget line if wage rate is w?
b. Show how the budget set changes with this in-kind transfer.
c. Suppose that the state reduces the income eligibility threshold, to say I’. Does this make it easier or harder for people to qualify for Medicaid?
d. What happens to the size of the region where workers have no incentive to work?