Reed can work up to 5000 hours per year at $8 per hour. He does not have any non-labor income.
A. Draw his budget constraint for leisure (L) and consumption (C).
B. Now suppose that Reed qualifies to participate in a welfare program that has an income guarantee of $8,000 per year and a benefit reduction rate of 50% (in other words – for every $1.00 he earns in the labor market, he must give back $0.50 of his subsidy). Draw his new budget constraint (on the same graph), labeling all relevant points.
C. Suppose that Reed was working 1000 hours per year before the intervention. What do you expect will happen to his labor supply once he is offered the welfare program? Draw some sample indifference curves to support your argument.
D. Suppose that Reed was working 3000 hours per year before the intervention. What do you think will happen to his labor supply once he is offered the welfare program? Explain.