Analyzing the Impact of a Non-Labor Income Grant
Imagine an individual whose preferences for 'consumption goods' (on the vertical axis) and 'hours of free time' (on the horizontal axis) can be represented by a set of parallel indifference curves. This person currently works a certain number of hours to earn income for consumption. Now, suppose the government introduces a program that gives this individual a substantial, unconditional cash grant every month, which increases their consumption possibilities without affecting their wage rate. Analyze how this grant would affect the individual's optimal choice between free time and consumption. In your analysis, be sure to explain:
- The key property of the individual's preferences implied by the parallel indifference curves.
- How the cash grant changes the individual's set of feasible choices.
- The likely change in the individual's chosen amount of free time and consumption, and the economic reasoning behind this change.
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