Reference no: EM132196973

Question: The Temporary Assistance for Needy Families (TANF) program has two features: a basic benefit guarantee and benefit reduction rate (take-back rate) or the rate at which the individual repays the basic benefit from wages earned.

a. Draw an earnings leisure diagram where the market wage rate is $10, the basic benefit is $3,000 and the take back rate is 50%. What is the break-even point where the individual is as well off participating in the TANF program as she is in the labor market without TANF participation? What are the number of hours of work at the breakeven point?

b. Next, consider a revision to the above TANF program where the basic benefit is reduced to $2,400, market wages remain at $10 per hour, and the benefit reduction rate (take-back rate) is reduced to 40%. Calculate the breakeven point for the revised program.

c. For persons, who have worked 400 hours in the original TANF program described in part a, does the revised program encourage or discourage work compared to the original program. Explain in terms of income and substitution effects. (Hint for the income effect: Calculate earnings at 400 hours when a person participates in the original and in the revised TANF programs. Then evaluate the income effect on leisure hours when changing from the original to the revised program? For substitution effect, examine the net wage in each program.)