Under typical welfare programs, welfare recipients receive a cash transfer and any wage earnings they have are taxed at the rate of 100% (i.e. if the cash transfer with 0 earnings if 400 Euros, then a person with 100 Euros in labor earnings gets a cash transfer of only 300 Euros). Suppose the government changes the program to allow individuals to keep the first 200 Euros in labor earnings, but any amount in excess of 200 Euros is taxed at 100%. Use the one-period model of labor supply to analyze the effect of this change in the welfare program on individuals‘decisions about whether to work and how many hours to work.
Explain your reasoning verbally and graphically.