Reference no: EM133079380

Assume that all workers have a time endowment of 100 hours a week could earn $10 an hour, but workers differ in their preferences over leisure and consumption. Suppose the Social Security disability insurance (SSDI) program was structured so that otherwise eligible recipients lost their entire disability benefit if they had any labor market earnings at all. Suppose, too, that Congress was concerned about the work disincentives inherent in this program, and that the relevant committee was studying two alternatives for increasing work incentives among those disabled enough to qualify for the SSDI program. Alternative A is to reduce the benefits paid to all SSDI recipients (from $500 to $300) but make no other changes in the program.

a) Draw original budget constraint (with a $500 SSDI benefit) and the budget constraint under alternative A.

b) Can alternative A increase labor supply for an eligible individual? Explain how it possible or impossible. If yes, show how on the graph in part a) with the old and new equilibrium clearly indicated.

c) Can alternative A have no effect on labor supply for an eligible individual? If yes, show how on the graph in part a) with the old and new equilibrium clearly indicated.

d) Can alternative A decrease labor supply for an eligible individual? Explain how it possible or impossible. If yes, show how on the graph in part a) with the old and new equilibrium clearly indicated.

The other alternative (alternative B) for reforming the disability system is to maintain the old benefit levels (for those who receive them) but allow workers to earn up to $300 a month and still keep their benefits. Those who earn over $300 per month would lose all DI benefits.

e) Draw the original budget constraint and the budget constraint under alternative B.

f) Can alternative B increase labor supply for an eligible individual? Explain how it possible or impossible. If yes, show how on the graph in part e) with the old and new equilibrium clearly indicated.

g) Can alternative B have no effect on labor supply for an eligible individual? If yes, show how on the graph in part e) with the old and new equilibrium clearly indicated.

h) Can alternative B decrease labor supply for an eligible individual? (Hint some current workers are eligible for SSDI but choose to work instead.) Explain how it possible or impossible. If yes, show how on the graph in part e) with the old and new equilibrium clearly indicated.

g) Suggest one other way the government could reduce the work disincentives inherent in the SSDI program.