2. Consider a woman who earns $10 per hour and who does not have non-labour income (V=0).

a. Assume that there are 168 hours in a week, draw her weekly budget constraint. Label the x-axis, the y-axis, the x-intercept, the y-intercept, the slope and the endowment point.

b. Suppose that this woman has one child, is eligible for welfare, and can receive up to $200/week from the local welfare agency. These benefits, however, are reduced by 50 cents for every dollar she earns. In other words, if E = weekly earnings, welfare benefits = 200-.5E. On the same graph as above, show how the welfare program affects her budget constraint. Be sure to label the slope of her new budget constraint.

c. How many hours a week can this woman work before her weekly welfare benefits are equal to zero?

d. Consider a woman who has a wage of $10 per hour and who, in the absence of a welfare program, works 20 hours per week. Assuming that this woman has one child and is eligible for welfare, what will the effect of the above mentioned welfare program be on the number of hours per week that she chooses to work. On your graph, illustrate the income effect, the substitution effect and the total effect.

e. Give a brief intuitive explanation for why the substitution effect and the income effect work in the same direction.

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