Suppose you are a single mother with two children living in Oregon, which has (actually, it used to have, but let’s ignore that) a TANF maximum guaranteed benefit of $460 per month. If you work, you earn $5/hour. You have no non-labor income.

(1) Suppose your benefits are reduced dollar for dollar with any labor income, and consider the leisure-consumption model presented in class (“more is better” for both goods, and standard indifference curves).   

(b) If, in the absence of TANF, you would work half-time (80 hours per month), how many hours does the model predict you will work now?

(c) Suppose instead that in the absence of TANF, you would work full-time (160 hours per month). Could TANF incentivize you to work more? Could TANF result in no change in your work decision? Could TANF incentivize you to stop working entirely? Could TANF result in a work reduction to some other positive number?

Circle all possible outcomes: WORK MORE NO CHANGE STOP WORKING REDUCTION

(e) Give a “real-world” explanation (in 3-5 lines) of why empirical observations might contradict the model’s prediction in (b).