Suppose a single parent can work up to 16 hours per day at a wage rate of $10.00 per hour. Various incomes maintenance programs have been developed to assure a minimum level of income for low-income families, such as Aid to Families with Dependent Children (AFDC). One of the problems with AFDC is that benets were reduced by $1 for every dollar earned, which creates a no-work incentive for those who are eligible. An alternative income maintenance program is Temporary Assistance for Needy Families (TANF), which also oers a no-work benet but a smaller reduction in wages for every dollar earned. The subsidy ends when the money income with program participation equals the money income earned without the program. A simplied version of this type of program is one that would give this single parent a $40 grant accompanied by a benet reduction of 75 cents for every dollar earned.
a. Draw the daily budget constraint without any program participation for the single parent described above.
b. On the same graph, draw the daily budget constraint under TANF for the single parent described above. At what level of money income does the subsidy end? How many hours of work would this be?
Discuss the eject of program participation on work incentives.
c. On the same graph, draw the daily budget constraint under AFDC for the single parent. According to AFDC, the family was given an income subsidy depending on family size and the family's benet was reduced by $1 for every dollar earned. Suppose the maximum subsidy for the single parent is $40.
d. Compare the eect of the TANF program on work incentives compared to the AFDC program