Assume that a person can work (or leisure) at most 16 hours per day times 30 days per month for a total of 480 hours. Rebecca can earn $10 per hour is she works. Draw Rebecca’s initial monthly budget constraint before the implementation of a government welfare program. Indicate the values of the endpoints of the budget constraint. Consider Policy #1:
The government guarantees $800 per month in income and reduces that benefit by $1 for every $2 in labor income, until the benefit reaches $200. After that point, the government does not reduce the benefit at all. (The government continues to pay out $200, regardless of the number of additional hours that are worked.)

Draw the budget constraint under Policy #1. Indicate the values of the endpoints of the budget constraint. Indicate the (leisure, income) values where the slope of the budget constraint changes.

Rebecca is initially working 180 hours per month before the policy change. Demonstrate with indifference curves the effect of the policy change on Rebecca’s labor supply. State the separate effects the income effect and the substitution effect will have on labor supply in this situation. If there is more than one possible effect of the policy change on Rebecca’s labor supply, clearly illustrate this in your diagram.