Question

A government program guarantees $18,000 in income, even for those who do not work at all. If the recipient earns income by working, then the $18,000 benefit is reduced by 50 cents for each $1 earned. Will this program eliminate the poverty trap?
A. Yes, enacting such a program will eliminate the poverty trap.
B. No, enacting such a program may still reduce the incentive to work.
C. Yes, and enacting such a program will cost the government less money.
D. Yes, enacting such a program will create adequate incentive to work.

Answer 1

Answer:

B. No, enacting such a program may still reduce the incentive to work.

Explanation:

Enacting a program where benefit is reduced by 50 cents for each $1 earned will not eliminate the poverty trap.

This is because the unemployed people that do not do any work still earn $18,000. The workers will only get 50 cents for every dollar earned working.

So if an individual works for $18,000 he will get an incentive of $9,000.

This is lower than the incentive to do no work at all.

People will not be motivated to work because the incentive is low.