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Suppose a country wants to introduce an earned income tax credit (EITC) for single mothers with children. It plans to implement it in the following way:

- For earnings below 8,000$ a tax credit of 20 percent can be claimed .

- For earnings between 8,000$ and 16,000$, the full tax credit can be kept .

- For earnings above 16,000$ the tax credit is phased out at a 10 percent tax rate .

a) Show graphically how the budget constraint changes after the introduction of the earned income tax and explain your reasoning. Clearly mark all the important points in your graph.

b) Using the basic static model of individual labour supply, what does the model predict will happen after the introduction of the earned income tax to

i. labour force participation of single mothers with children

ii. labour supply of single mothers with children that earn below 8,000$ without the EITC (but are working)

iii. labour supply of single mothers with children that earn between 8,000$ and 16,000$ without the EITC

iv. labour supply of single mothers with children that earn above 16,000$ without the EITC.

You do not have to answer this question using graphs, but shortly explain your answer in each case.