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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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#### Solution Preview

Hi,

Regards

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.

\$2.49