Discuss effect of program participation on work incentive

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Reference no: EM13208712

Suppose a single parent can work up to 16 hours per day at a wage rate of $10 per hour. Various income maintenance programs have been developed to assure a minimum level of income for low-income families, such as AFDC (Aid to Families with Dependent Children). One of the problems with AFDC is that benefits were reduced by $1 for every dollar earned. An alternative income maintenance program is Temporary Assistance for Needy Families (TANF), which also offers a no-work benefit but has a smaller reduction in wages for every dollar earned. A simplified version of this type of program is one that would give this single parent a $40 (no-work) grant accompanied by a benefit reduction of 75 cents for every dollar earned.

a). Draw the daily budget constraint without any program participation for the single parent described above.

b). On the same graph, draw the daily budget constraint under TANF for the single parent described above. At what level of income does the subsidy end? Discuss the effect of program participation on work incentives.

c). On the same graph, draw the daily budget constraint under the AFDC for the single parent described above.

d). Compare the effect of the TANF program on work incentives compared to the AFDC.

Reference no: EM13208712

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