Q. Assume Lorne has 20 hours every day that can be spent either working or at "leisure". Assume (at least
initially) that Lorne earns all income from working at the after-tax wage rate of $10/hour.

(a) Using an indifference curve, illustrate Lorne's decision if he decides to work 10 hours every day. Estimate and in your diagram, identify Lorne's quantity of leisure, supply of labour and consumption. Illustrate what is the price of leisure?

(b) Assume the government institutes a program that will pay Lorne $100/day. Explain however, if he works, he will have to pay back the government benefit with any labour income he earns until the full $100 is paid back. Only after that will he be able keep any further labour income. Illustrate the new budget line in your diagram. Explain how much labour will he supply? Explain how much consumption will he have? Is he better off or worse off than he was in part (a)?

(c) Now Assume the government changes the program. It will still pay $100/day, but now if he works, Lorne will have to pay only half of his labour income to the government until the full $100 is paid back. Illustrate the new budget line in your diagram. If he chooses to work 4 hours under the new scheme, explain how much consumption will he have? Is he better off or worse off than he was in part (b)?

Which version of the program costs the government more?