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John earns £4 per hour and he has no non-labour income. He decides to work 30 hours per week.
(a) Show John's utility maximizing choice of leisure and his weekly income on a diagram.
(b) Now the government introduces a welfare system that provides a minimum lump-sum income of £80 per week. Draw John's new budget line. Assuming that leisure is a normal good, will John work fewer hours under the welfare system? Explain.
(c) Instead of the lump-sum payment in (b), the government offers John an extra 50p per hour worked. Draw the new budget constraint. Assuming again that leisure is a normal good, will John work more or less than 30 hours per week? Explain.
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