Suppose that there is a welfare program with an income guarantee of $6000 and a benefit reduction rate of 50 percent. In the absence of the program, an individual can work up to 2000 hours per year at an hourly wage of $8 per hour.
A. Draw the person's budget constraint with the income guarantee.
B. Suppose that the income guarantee rises to $9,000 but with a 75% reduction rate. Draw the new budget constraint.
C. Which of these two income guarantee programs is more likely to discourage work? Explain.
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