Reference no: EM132201176
Question: Jess can work a maximum of 60hours in a week. He has the opportunity to work for $12per hour and he has no unearned income. With the income that he earns from working he purchases cans of bean sat a price of $1 per can. Assume that he is initially working 15hours per week. Finally, assume that the goods are not perfect complements.
a) Putting hours of leisure on the x-axis and cans of beans on the y-axis illustrate Jess's budget set, his best bundle on his budget line and an indifference curve through that bundle. Plan A:
The government introduces a cash assistance program for low income individuals. If an individual has no earned income, then the government will pay that individual $240 for the week. For each dollar that the individual earns, the government reduces that payment by $1. For example, if a person earns$40, the government payment would be reduced by $40to $200.If the individual earns more than $240 then he receives no payments from the government.
b) In your diagram for part (a) illustrate Jess's budget set after the introduction of the government's assistance plan. Your budget set will contain two kink points. You must label the coordinates of both kink points.
c) Explain why working 0 hours after the assistance plan is introduced is the best bundle on his new budget line. Plan B: An alternative program would be for the government to give each individual $240per week as before, but to reduce the payments at a rate of only $0.50 per $1 earned. Thus, if an individual earned $40 the payments would only be reduced by $20.
d) In your diagram illustrate the budget line associated with Plan B. What bundles are common to this budget line and the original (no assistance) line?
e) Is it possible that he will work a positive number of hours under Plan B? You can use your diagram to explain your answer.
f) Assuming that Jess works a positive number of hours, illustrate the cost to the government of Plan B. Which is cheaper for the government, Plan A or Plan B? Briefly explain.