D2CA387Ad01 - Professor Brown Economics 441 Problem Set#3...

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Professor Brown Posted November 6, 2007 Economics 441, Problem Set #3 Due in discussion Nov. 15-16, 2007 This problem set will be graded out of 10 points. 1. (5 points) The government is concerned about low income households and thus institutes a transfer benefit that ensures that all households, no matter what actions they choose, can consume at least G = $14 per day. Total time T = 24 hours in a day. Time is allocated between work hours, H, and leisure, L. Households each include only one worker. Workers choose the number of hours to work in a day. The going wage is w. Households consume all earnings plus any transfer benefit B from the government, so that C = wH + B. No one saves. The government transfer benefit to non-working households is B = G = $14. The government transfer to a household that works H hours “tops up” consumption to G = $14 whenever wH < G. Whenever wH G, B = 0. (a) Write an expression for the amount of the government transfer benefit. Draw the budget constraint of the consumer in consumption-leisure space. What is the effect of implementing a benefit program where there was none before on the labor hours supplied by a household that consumed less than G before the program? What is the effect on its welfare (better or worse)?
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