Draw the budget constraint before 1981 and after 1981

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Prior to 1981, the government imposed only a 67 percent (instead of a 100 percent) marginal tax rate on income earned by a mother receiving AFDC. Draw the budget constraint before 1981 and after 1981. Draw the indifference curve of someone who prefers to remain out of the labor force under both regimes. Draw the indifference curve of someone who worked before 1981 but chose not to work after 1981. Show how, for this person, lowering the tax rate will increase utility, reduce costs to the welfare system, and increase labor supply. Finally, draw the indifference curve of someone who worked both before and after 1981. Show how, for this person, the lower tax rate affects AFDC costs and affects labor supply. What can you say about government policy if there are some individuals of the first type, some of the second type, and some of the third type?

Reference no: EM131431338

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