1. Suppose that there are two forms of workers' compensation for employees that are permanently injured on the job:

1) A payment of $40 a day, regard less of whether or not a person works.

2) A payment of $20 a day, regardless of whether or not a person works. Those who do work receive an additional $5 per hour along with the standard hourly compensation.

a) Assume that the standard hourly compensation is $10 an hour and that an individual initially has zero nonlabor income. Draw an arbitrary budget constraint for a person assuming that he or she receives no workers' compensation. Then draw the two budget constraints that arise from the two different forms of workers' compensation. At what value of hours of work do the two budget constraints intersect?

b) Analyze the difference in the labor supply incentive effects of these two programs.

2. Consider a variant of the endogenous growth model in which future human capital is also a function of average human capital in society. This can be expressedas:

H' = h^αb(1 -u)H^β, 0 < α, β <1

where h is average human capital. Suppose individuals only consider their own consumption when optimizing, but after their decision, it is assumed that h = H, so that in equilibrium:

H' = b(1 - u)H^{α + β}

Explain the growth path of human capital in the economy if:

a) α + β <1

b) α + β =1

c) α + β >1