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Problem Set 2 - Problems on Labor Supply Welfare Programs...

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Problems on Labor Supply: Welfare Programs * October 1, 2010 1. Consider a welfare program with a basic benefit of $5 , 000 and a benefit reduction rate of 40%. The wage rate is $10 per hour and the total time available in a year is 2000 hours. (a) What is the number of hours worked at which the welfare payment to the worker becomes zero? (b) What is the income of the worker when the welfare transfer becomes zero? (c) What is the income of the worker when he works for 1000 hours? (d) What is the income of the worker when he works for 1500 hours? 2. Suppose that the wage rate is $10 per hour and the total time available in a year is 2000 hours. Consider two welfare programs: Program 1 has a basic benefit of $5 , 000 and a benefit reduction rate of 40% while Program 2 has a basic benefit of $4 , 000 and a benefit reduction rate of 20%. (a) Draw the budget line for welfare Program 1. (b) On the same graph draw the budget line for welfare Program 2. (c) A researcher claims that there are exactly two choices for number of hours worked at which the total income under both the welfare programs are equal. What are those two choices
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