Question

Please see the attachment for the full question.

How should I draw the income leisure graph from part a) and part b), and what are the slopes? Also, what are the differences between part a) and b), and how will they affect the economy? Thank you.

2. Consider a province with the following employment insurance (EI) program. Individuals choose to allocate labour and leisure across 52 weeks of the year. All individuals who have worked for at least 10 weeks are eligible for up to 75% of their market earnings for a total of 30 weeks. (a) If the market wage is $100 per week, draw the budget constraint faced by a hypo- thetical individual in this economy. Be sure to label all axes, slopes, and intercepts. You can assume we are interested in studying the behaviour of an individual with no non-market income. (b) Suppose the government, under pressure from voters to decrease the deficit, begins to implement substantial austerity measures. Part of these measures includes a reduc- tion in EI benefits. After a careful economic evaluation, the government reduces the benefits to be 50% of market earnings for a total of 20 weeks. As before, individuals are eligible after 10 weeks of work. i. Draw the new budget constraint in the same graph as part (a). ii. How would you expect aggregate labour supply to change when moving from the El program in part (a) to the one in part (b). Explain carefully.

Answer 1

Figure 1

The budget constraint is drawn on figure above figure - 1 the initial budget line in ABCD it has two at B and C for L lessthanorequalto 10 and L > (52 - 10) = 42, the total earning at the rate of $100/week is r = c = 100(52 - l) l greaterthanorequalto 42 at l = 42 at point c the income in 1000 for next 10 lessthanorequalto L < 30, the worker earns EI at ate of 75% of earned income then effective wage rate is 175 then r = c = 175(52 - l) for 42 greaterthanorequalto l > + 1000 this part is BC and at B, c = = 6250 after L greaterthanorequalto 30 the consumer receives no EI then for r = c = 100(52 - l) + 6250 for l lessthanorequalto 12 let the government policy changes the total week and percentage of EI the budget line shift to A'B'CD for