Assume the average worker has 100 hours of leisure

| November 24, 2016

Assume the average worker has 100 hours of leisure and could earn $10 an hour.Suppose the Social Security disability insurance (DI) program was structured so thatotherwise eligible recipients lost their entire disability benefit if they had any labormarket earnings at all. Suppose, too, that Congress was concerned about the workdisincentives inherent in this program, and that the relevant committee was studying twoalternatives for increasing work incentives among those disabled enough to qualify for it.Alternative A was to reduce the benefits paid to all DI recipients (from $500 to $300) butmake no other changes in the program.

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

b)Can this program increase labor supply? Explain how it possible or impossible. If yesshow how graphically

c) Can this program have no effect on labor supply? If yes show how graphically.

d)Can this program decrease labor supply? Explain how it possible or impossible. If yesshow how graphically

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