Consider the following policy to help the working poor: There is no credit if nothing is earned
Question:
Consider the following policy to help the working poor:
There is no credit if nothing is earned
The credit equals $0.34 per dollar earned, peaking at $3,050, when the worker earns $8,950
per year.
It remains at $3050 until the worker earns $16,450 per year
It is then phased out gradually, by $0.16 per dollar earned, until eliminated completely
when the worker earns $35,535 or more per year
a. [3 marks] Graph this budget constraint (assuming consumption equals income) and compare
it against one without such a policy. For simplicity, assume the max this worker can receive
is $50,000 per year
b. [1 mark] Assuming the substitution e ect is greater than the income e ect, does this policy
increase hours of work for those eligible?
c. [1 mark] Consider an individual who was not working before the implementation of this
policy. Will this subsidy increase the probability of them entering the labour force?
Expert Answer:
a The graph below shows the budget constraint with and without the policy The budget constra... View the full answer
