Consider the following two antipoverty programs: (1) a payment of $15/day to be
ID: 1113433 • Letter: C
Question
Consider the following two antipoverty programs: (1) a payment of $15/day to be given this year to each person who was classified as poor last year provided he works at least 6 hours a day, or (2) each person classified as poor will be given a benefit of 25% wage income he earns every day this year.
(a) Show how each program would affect the budget constraint of a representative poor worker who can work at $8/hr. (2+4 = 6 points)
(b) Which program would be most likely to maximize the utility and reduce the number of hours worked? Explain why. (2+4 = 6 points)
(c) Which program would be most likely to maximize the utility and reduce the number of hours worked if wage rate goes up to $12/hr? Explain why in detail.
Explanation / Answer
(a) Budget constraints:
Program(1)
C+8z = 24*8+15 = 207 if z<=(18)
C+8z = 24*8 = 192 if z>18
Program (2)
C+(8+0.25*8)z = (8+0.25*8)*24
C +10z=240
(b) The program (2) will maximize utility and reduce the number of hours worker. Under program (2) the budget constraint is above the budget constraint from program (1). All the consumption bundles.
(c)Program (1) New budget constraint at wage = $12
C+12z = 24*12 = 288 if z>18
Program(2)
C+(12+0.25*12)z = (12+0.25*12)*24
C +15z=360
If wage goes up to $12 then also the budget constraint with the program (2) will lie above the budget constraints from Program (1). This imply that bundles other than on the budget line from program (2) lies inside and are inefficient. The consumption on Budget line with program 2 also reduces the number of hours woked unanimously.