Suppose that under a proposed welfare plan

Reference no: EM13692625

1. Suppose that under a proposed welfare plan, poor people are eligible to receive a lump-sum payment of $50 each day. However, if they accept this welfare payment, they must pay a high tax, t = 50%, on all additional income they might earn by working. If they do not accept the welfare payment, they do not have to pay a tax on their earnings.

2. Sketch the budget line of a typical poor person if they do not take the lump-sum payment. Assume they have no other outside source of income but that they can work all 24 hours if they want at a job paying $6 per hour.

3. On the same graph, sketch the budget line of the same typical poor person if they DO take the lump-sum payment. Again assume they have no other outside source of income but that they can work all 24 hours if they want at a job paying $6 per hour.

4. Show that whether or not this person accepts the lump-sum payment will depend on their particular tastes for labor and leisure.

Reference no: EM13692625

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