Suppose that there are two aid programs that needy families can apply for. Under the first program, the State of Oregon gives $5,000 to families who have income levels below $20,000. The second program, operated by the federal government, is an income maintenance program that gives families a sum of money that brings their family income up to $23,000 if it ever falls below this level (i.e., the federal government runs a need-based program).
a) First, construct the budget constraints implied by each program separately. Assuming that the federal program awards money before the state program (and any federal support is thus considered income in determining state assistance), and Oregon forces people to first apply federally, construct the budget constraint faced by a typical resident of Oregon taking both programs into account. Be sure to label all axes and values.
b) Suppose that there are 1 million families that would qualify for the Oregon program based on their family's earned income. Given the existence of the federal program, how much would you expect Oregon's program to cost the state?
c) Suppose that federal officials are considering abolishing their aid program and that you have been charged with advising policy makers on the ramifications of such a change. Discuss the cost and labor-supply implications of such a proposal. (Assume that the state aid program would remain unchanged.)