Chapter 14, Problem 2DQ

To determine

The net monetary gain in each scenario and the way in which the incentive to work differs from scenario to scenario.

Concept introduction:

Unemployment Benefits:

Unemployment benefits refer to the amount of money that a government provides to the young people who are actively searching for job but are unable to find one. It is a form of allowance to the unemployed youth.

Net Monetary Gain:

Net monetary gain is defined as the money that is left after the deduction of unemployment benefits and income tax.The formula to calculate net monetary gain is,

$\text{Net}\text{monetary}\text{gain}=$

$\text{Payment}\text{from}\text{neighbor}-\text{Unemployment}\text{benefit}-\text{Income}\text{tax}$

Explanation:

Net monetary gain in scenario 1:

Given,
Payment from the neighbor is $500.
Unemployment benefit is $200.

The formula to calculate net monetary gain is,

$\text{Net}\text{Monetary}\text{Gain}=$
$\text{Payment}\text{From}\text{Neighbor}-\text{Unemployment}\text{Benefit}$

Substitute $500 for payment from neighbor and $200 for unemployment benefit.

$\begin{array}{c}\text{Net}\text{Monetary}\text{Gain}=\$500-\$200\\ =\$300\end{array}$

Therefore, the net monetary gain is $300.

Net monetary gain in scenario 2:

Given,
Payment from the neighbor is $500.
Unemployment benefit is $100.
Income tax is $100

The formula to calculate net monetary gain is,

$\text{Net}\text{Monetary}\text{Gain}=$
$\left(\begin{array}{l}\text{Payment}\text{From}\text{Neighbor}-\text{Unemployment}\text{Benefit}\\ -\text{Income}\text{Tax}\end{array}\right)$

Substitute $500 for payment from neighbor, $100 for unemployment benefit and $100 for income tax.

$\begin{array}{c}\text{Net}\text{Monetary}\text{Gain}=\$500-\$100-\$100\\ =\$300\end{array}$

Therefore, the net monetary gain is $300.

Net monetary gain in scenario 3:

Given,
Payment from the neighbor is $500.
Unemployment benefit is $0.
Income tax is $100

The formula to calculate net monetary gain is,

$\text{Net}\text{Monetary}\text{Gain}=$
$\left(\begin{array}{l}\text{Payment}\text{From}\text{Neighbor}-\text{Unemployment}\text{Benefit}\\ -\text{Income}\text{Tax}\end{array}\right)$

Substitute $500 for payment from neighbor, $0 for unemployment benefit and $100 for income tax.

$\begin{array}{c}\text{Net}\text{Monetary}\text{Gain}=\$500-\$0-\$100\\ =\$400\end{array}$

Therefore, the net monetary gain is $400.

• Scenario 3 has the largest incentive, as the person is working more. In this case, there is no income tax, and the unemployment benefit is also less i.e. $100.

• Scenario 1 has the least incentive because the unemployment benefit is $200. As the unemployment benefit increases, the incentive to work decreases.

• Scenario 2 is a situation between scenario 1 and scenario 3. This is because it has both income tax and unemployment benefit i.e. $100.