Suppose that the government introduces an EITC such that for the first $8,000 in earnings, the government pays 50¢ per dollar on wages earned. For the next $3,000 of earnings, the credit is held constant at $4,000, and after that point the credit is reduced at a rate of 20¢ per dollar earned. When the credit reaches zero, there is no additional EITC.
a. Draw the budget constraint that reflects this EITC for a worker who can work up to
4,000 hours per year at an hourly wage of $10 per hour.
b. Illustrate on your graph the portions of the budget constraint where the labor supply effects of the policy are positive, negative, or ambiguous, relative to the “no
policy” status quo.

  • CreatedApril 25, 2015
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