ECO 2114 Chapter Notes - Chapter 3: Reservation Wage, Abscissa And Ordinate, Negative Income Tax
25 Apr 2016
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This can be seen by examining figure 3. 1. The income level at the post-demogrant equilibrium ed is higher than that associated with eo. The reason underlying this result is the income effect. As income rises, she purchases more leisure, which is a normal good. She will thus work fewer hours, and income earned from working will fall. Total income, including both the demogrant and the earned income, will rise. If the individual is genuinely disabled, there are no work disincentives. He/she is constrained to work 0 hours, which means that he/she will locate on the right edge of the income/leisure diagram under any economic circumstances. Regardless of the amount of the demogrant (the compensation payment), he/she will always be located on that edge at. Recall that at these corner solutions, the slope of the indifference curve does not equal the slope of the budget line.
