same three persons we’ve been discussing. For Mr. X, the disincentive is defi- nitely reduced, since the tax rate on work is lower. Under the old system, there was no incentive for Mr. X to work, since each $1 of earnings simply reduced benefits one for one, so he chose point D. Now, because Mr. X gets to keep 50¢ of each $1 he earns, he will move to a new point such as X2, which features less leisure (more labor supply) but more consumption than at point D. For Ms. Y, the disincentive is also reduced. She also faced a 100% tax rate on earnings before, so when she joined the welfare program she automati- cally chose not to work at all (point D). Now, with a lower tax on earnings, she chooses a point such as Y2, with much less leisure than at point D but more consumption as well. For Mr. Z, however, there is a new disincentive to supply labor that was not present before. Under the old program, the welfare segment of the budget constraint left him on a much lower indifference curve, so he ignored the welfare option. Now, welfare becomes a relevant choice: his indifference curve falls below the new welfare segment B2D of the budget constraint, so he chooses to receive welfare and operate at point Z2, with much higher leisure (less work) and only slightly lower consumption. While labor supply has increased (leisure has fallen) for Mr. X and Ms. Y, labor supply has fallen (leisure has increased) for Mr. Z. Thus, the net impact of the new welfare program on labor supply is