Question

10

Consumption $1,000 IIIIIIIIIIIIII $300 100 Leisure

10.

The above diagram illustrates an indifference curve and two b

udget lines for the same

worker. The thick line

is with a Universal Basic Income (UBI) p

rogram, while the thin

line is without such a program. (The two lines coincide for con

sumption values above

$300.) The worker has 100 hours per week to allocate between wo

rk and leisure, and faces

the market wage of $10 per hour. Without the program, the worke

r chooses 38 hours of

leisure per week. With the U

BI program, the worker will

A.

drop out of the labour force.

B.

participate in the labour force but work less than 62 hours per

week.

C.

work exactly 62 hours per week.

D.

work more than 62 hours per week if the substitution effect is

stronger than the income

effect and work less than 62 hours per week otherwise.

E.

work more than 62 hours per week if the substitution effect is

weaker than the income

effect and work less than 62 hours per week otherwise.

Answer 1

It shall be noted that Indifference curve representing different levels of utility does not intersect each other.

Initially, without UBI program, the individual chose 62 hours of work and 38 hours of leisure. That means, $620 (62 hours of work at $10 per hour) and 38 hours of leisure worked optimal for the individual.

With UBI program, the individual has the option to earn $300 and enjoy entire 100 hours of leisure.

An indifference curve over the point ($300, 100 hours of leisure) seems to be lower to IC curve implying lower utility.

Thus, with UBI program, the individual would still choose 62 hours of works.

Hence, the correct answer is C. work exactly 62 hours per week.