Instruction: Please answer the following questions. If the question discusses a graph or diagram, be sure to draw it as well (in order to have a chance at full credit for a given part/question). It also goes without saying that in answering each question you need to explain your answers.
For the following questions, consider an individual with M dollars of income spending her money on two goods, X, and X, with prices P, and P2, respectively. You can thus write the budget constraint as: M = P1 X1 + P2X2.
1. Draw a graph of the budget constraint showing all of the possible combinations of X, and X2, this individual can purchase Label all of the affordable bundles of X, and X2, as well as the unaffordable bundles.
2. Suppose this individual earns her income by working t hours a day at a wage of w per hour. Rewrite the budget constraint using this representation of income and, for all questions going forward, use this representation of income as the income component of your budget constraint.
3. Add savings, 5, to the budget constraint as a use of income and, for all questions going forward, maintain S as a use of income.
a. Suppose the individual loses her job: can she still purchase the two goods?
4. Suppose the individual loses her job, has no savings, and yet still needs to purchase the two goods. Suppose further that social security in the form of unemployment insurance does not exist. Describe a few likely scenarios that might occur as a result.
a. Suppose unemployment insurance exists and consider the following scenarios:
i. If she loses her job and could earn 100% of her income via unemployment insurance for 6 months, describe her incentives to work when she still has a job and her incentives to find a job when she is unemployed. Draw this scenario in a graph with percent of income earned via social security payments on the vertical access and months on the horizontal access.
ii. If she loses her job and could earn 50% of her income via unemployment insurance for 6 months, describe her incentives to work when she still has a job and her incentives to find a job when she is unemployed. Draw this scenario in a new graph with percent of income earned via social security payments on the vertical access and months on the horizontal access.
iii. If she loses her job and could earn a declining share of her income via unemployment insurance for 6 months, describe her incentives to work when she still has a job and her incentives to find a job when she is unemployed. In other words, for example, she gets 100% the first month unemployed, 90% the second month, 80% the third month, etc. Draw this scenario in a new graph with percent of income earned via social security payments on the vertical access and months on the horizontal access.
iv. Which structure, if any, do you recommend? Is unemployment insurance a useful policy for social protections? What if this individual provides for a family?
5 Suppose we are back in question (3) without unemployment insurance and the individual loses her job, but has the opportunity to gain a government job via a government jobs program that pays a wage wG per hour of work.
a. Describe what could happen to this individual if there was no lag in obtaining the government job once she lost her job
i. How does this impact her incentives to work and look for a job both before and after losing her original job?
ii. What if a requirement of the government jobs program was that she also had to look and apply for jobs outside of this program - how would this impact her incentive structure?
b. Describe what could happen to this individual if she could not obtain the government job until after 6 months of unemployment and providing verifiable proof of looking/applying for other jobs.
c. Suppose this individual had access to both the government jobs and unemployment insurance programs. Describe whether or not you think this is a good idea from a policy perspective. In your answer, be sure to consider the role these dual policies have on incentive structures. Also consider some differences in the scale and scope of the programs as they would apply across different socio-economic-demographic groups.