Karen is a single mother with one child. She has T=90 hours per week of free time but zero non-labor income. She
faces a market wage rate of w=$5 (per hour). Currently, the government has a child benefit program which provides $100 per week for eligible parents with children. Karen is eligible for this benefit, but the program design is such that the benefit is deducted to zero once she begins working.
a) Write down Karen's budget constraint under the current child benefit program. Graphically illustrate her budget constraint on a consumption-leisure graph.
only has T1=50 hours of free time. Recalculate Jeff's optimal choice of consumption and leisure
Jeff's wages affects his indifference curve, budget constraint, and optimum. How does Jeff's working hours change compared to the first case where he was healthy and earned $25 per hour?
Hint: Notice that Karen's budget constraint consists of two parts: when she is receiving benefits and when she is not. Also, notice that her benefit receipt is conditional on her working hours.
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