A. Dana earns a low wage: $5.00 per hour. Assume Dana has 16 hours per day for work or leisure and assume that she has no non-earned income. A. Draw a budget line and an indifference curve for Dana.
B.Suppose New Jersey enacts a welfare program such that people like Dana will be assured of some income, regardless of earnings. Suppose Dana receives $25.00 per day from the state of NJ, with no strings attached. Redraw the budget line and a new indifference curve. What do you think will happen to Dana's hours of work? Explain why using the income and/or substitution effects.
C. Now, suppose NJ enacts an additional restriction, such that Dana will lose 50 cents of the support payment for each dollar earned. Re-draw the budget line, again, indicating the break-even amount. What do you suppose will happen to hours worked compared to b? Explain why using the income and/or substitution effects.