Since the early 1970’s, the U.S. government has had a program called the Earned Income Tax Credit. A simplified version of this program works as follows: The government subsidizes your wages by paying you 50% in addition to what your employer paid you but the subsidy applies only to the first $60 (per day) you receive from your employer. If you earn more than $60 per day, the government gives you only the subsidy for the first $60 earned but nothing for anything additional you earn. For instance, if you earn $100 per day, the government would give you 50% of the first $60 you earned — or $30. Suppose you consider workers 1 and 2. Both can work up to 10 hours per day at a wage of $10 per hour, and after the policy is put in place you observe that worker 1 works 7 hours per day while worker 2 works 5 hours per day. Assume throughout that Leisure is a normal good. (a) Illustrate these workers’ budget constraints with and without the program. (b) Can you tell whether the program has increased the amount that worker 1 works? Explain. (c) Can you tell whether worker 2 works more or less after the program than he did before? Explain. PLEASE DONT FORGET TO DRAW BUDGET CONSTRAINT GRAPHS
Since the early 1970’s, the U.S. government has had a program called the Earned Income Tax Credit. A simplified version of this program works as follows: The government subsidizes your wages by paying you 50% in addition to what your employer paid you but the subsidy applies only to the first $60 (per day) you receive from your employer. If you earn more than $60 per day, the government gives you only the subsidy for the first $60 earned but nothing for anything additional you earn. For instance, if you earn $100 per day, the government would give you 50% of the first $60 you earned — or $30. Suppose you consider workers 1 and 2. Both can work up to 10 hours per day at a wage of $10 per hour, and after the policy is put in place you observe that worker 1 works 7 hours per day while worker 2 works 5 hours per day. Assume throughout that Leisure is a normal good.
(a) Illustrate these workers’ budget constraints with and without the program.
(b) Can you tell whether the program has increased the amount that worker 1 works? Explain.
(c) Can you tell whether worker 2 works more or less after the program than he did before? Explain.
PLEASE DONT FORGET TO DRAW BUDGET CONSTRAINT GRAPHS
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