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    Benefit reduction rate

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    Consider an income guarantee program with an income guarantee of $6,000 and a benefit reduction rate of 50%. A person can work up to 2,000 hours per year at $8 per hour.
    A. Draw the person's budget constraint with the income guarantee.
    B. Suppose that the income guarantee rises to $9,000 but with a 75% reduction rate. Draw the new budget constraint.
    C. Which of these two incomes guarantee programs is more likely to discourage work. Explain.

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    Given that,
    Income guarantee=$6,000
    Benefit reduction rate=50%
    Person can work upto=2,000 hours per year at $8 per hour

    (a) If a person works for 0 hours i.e. he/she consumes 2,000 hours of leisure then in this situation he/she will be eligible for a complete $6,000 of income guarantee. But if it works for 1,500 hrs and consumes only 500 hrs of leisure then in this situation he will earn $8*1,500=$12,000 and this is equal to =$6,000/0.5=$12,000, hence ...

    Solution Summary

    Benefit reduction rate is applied.