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.
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.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:2. Practice on EITC, income and substation effects
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. If this worker works for 2000 hours a year before the program is
introduced, what will be the income and substitution effects? Will he
work more hours or less in the face of the EITC program?
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