Principles of Microeconomics / Unit 14 MIC 1305 worked example, 60 to 90 seconds
The Poverty Trap in Numbers
The idea
Given a wage, a guaranteed benefit and a benefit-reduction rate, compute income at several hours of work: earnings plus the guarantee minus the reduction rate times earnings, with the benefit never below zero. Report the net gain per hour of work, which is the wage times one minus the reduction rate. Then rerun with a lower reduction rate and show what changes, and what it costs.
In practice
Worked example: the wage is ten dollars, the guarantee fifteen thousand, and benefits fall a dollar per dollar earned. At zero hours, income is fifteen thousand. At a thousand hours, earnings of ten thousand cut the benefit to five thousand: still fifteen thousand. At fifteen hundred hours the benefit is gone and income is still fifteen thousand; only beyond that does work pay. Net gain per hour: zero. Now benefits fall fifty cents per dollar. A thousand hours gives ten thousand earned plus ten thousand benefit, twenty thousand; two thousand hours gives twenty-five thousand. Net gain per hour: five dollars, and benefits now continue until earnings reach thirty thousand.
Where people slip
The flat stretch is the trap; its length is the guarantee divided by the wage. And the fifty-cent rule pays benefits to families earning up to twice the guarantee, which is why loosening the trap is expensive even though it raises work.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
Builds on
Unlocks
- Nothing yet depends on this.
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