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Question: Most jurisdictions allow welfare recipients to earn a small amount of labour market


before the tax back of welfare benefits begins. Using the work-leisure diaram, show how this more realistic welfare program compares to the one described in class. In the late 1990s, the Ontario government increased the amount of labour income disregarded (i.e., allowed before welfare benefits are taxed back), at the same time reducing the overall level of benefits. Analyze the expected impact on labour supply of a prospective welfare recipient of this change in the welfare program.

In class we used a simple model where people chose between either labour or welfare.

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