Part II. Answer the following. Show your work for all answers. 10 points each. 1. After watching the TV show American Idol, Blake thinks that people prefer younger performers over older performers. Maybe this is because younger singers have a “lighter” voice that sounds more pleasant. Thus, Blake thinks younger voters will receive more votes. To answer his question, he gets …show more content…
4. a. Consider a worker with a market wage w=9 and non-labor income V=0 and T=16. Draw the worker’s budget constraint for her consumption-leisure choice with consumption (C) on the vertical axis and leisure (L) on the horizontal axis.
C Slope=-9 Slope=-6
b. Suppose that the government wants to provide welfare assistance. It will increase the worker’s after tax income by subsidizing the wage by $3 per hour for the first 4 hours worked (phase in). During this phase in period, the wage is thus 12. The government then removes the subsidy over the next 4 hours worked (phase out) at the rate of $3 per hour. The subsidy fully disappears after 8 hours worked, at which point the worker earns her market wage. What is the take home pay (after the subsidy) at L=8, L=12, L=16? At L=8, subsidy=0, so take home = 8*9=72 At L=12 (max subsidy), take home = 4*12= 48 At L=16, the subsidy =0 and she is not working, so take home is 0 c. Draw the new budget constraint on the graph you’ve drawn above. Indicate the slope of the budget constraint along all parts. Thus, during the phase in of the subsidy, the slope = -12. During the phase out period, the benefit falls so the slope = -6. When there is no benefit, the slope is equal to the wage, -9. d. Explain the effect of the welfare assistance on hours worked for the phase in and the phase out segments. Be