1. (4 points) Consider a tax credit program that is similar to the U.S. Earned Income Tax Credit (EITC). The policy parameters for this program is as follows (keep in mind that the time frame is annual): There is no credit if earnings are zero. Phase-in: For earnings up to $4,000, the credit equals $0.25 per dollar earned. Plateau: For earnings from $4,000 to $9,000, the credit amount remains the same. Phase-out: The credit decreases by $0.20 per dollar earned above $9,000, until eliminated completely.

a) (1 point) Graphically illustrate how the credit amount varies with annual earnings. Label the tax credit amount on the vertical axis and annual earnings on the horizontal axis. Clearly label the following values on your graph: - Maximum credit amount - The beginning and ending earnings for each credit region (i.e., phase-in, plateau, and phase-out)

b) (1 point) Graphically illustrate the budget constraint associated with this tax credit program for a typical worker who earns $w per hour, has zero non-labor income, and has T hours of annual time endowment. Label consumption on the vertical axis and annual leisure on the vertical axis. Note: You must correctly label the slope of each segment in order to get full marks.

c) (2 points) Consider a counterfactual world where this tax credit program does not exist. Explain how an individuals labor supply would change after the tax credit program is introduced. You should provide separate explanations for each of the following cases:

- Individuals who did not work prior to the introduction of the program. - Individuals whose earnings were in the range of the phase-in region prior to the introduction of the program. - Individuals whose earnings were in the range of the plateau region prior to the introduction of the program. - Individuals whose earnings were in the range of the phase-out region prior to the introduction of the program.