Sylvia lives in California and qualifies for the CalWorks program (California’s version of TANF). CalWorks participants can earn $225 per month without having their benefits reduced. Beyond $225, benefits are reduced by 50 cents for every dollar of earnings (a 50% benefit reduction rate). The maximum grant is $725 per month.
a. Suppose Sylvia earns $10 per hour. Use the information above to illustrate Sylvia’s income/leisure options with and without CalWorks. Label your graph carefully!
b. At what level of earnings does the benefit become zero?
c. Suppose in the absence of CalWorks that Sylvia earns $1380 per month. What is her benefit under the CalWorks program?
d. How do you think Sylvia will respond to the program? Will she work more, less, or the same?