timer Asked: Apr 12th, 2018

Question Description

5. (6 points) EITC. Assume that the structure of EITC is as follows: During the phase-in range, EITC recipients receive an additional 20% of their income for each dollar earned up to a maximum of a $2,000 credit. They can earn this $2,000 credit until the phase-out range, which begins when they start earning $15,000 or more. During the phase-out range, the credit reduces by 10% until it reaches $0. (a) (2 points) Graph the structure of the EITC with Income on the X-axis and the EITC credit on the Y-axis. Clearly label all relevant points on the graph, including the maximum credit, earnings when the credit reaches $0, and earnings at the end of the phase-in range and at the beginning and end of the phase-out range. (b) (2 points) Now assume a worker earns $1,000 per-week if she works and can work up to 40 weeks a year. Plot a budget constraint for consumption (Y) on the Y-axis and hours of Leisure (L) on the X-axis assuming that EITC exists. Now, on the same graph, draw her budget constraint before EITC legislation was enacted (i.e. if EITC never existed). Be sure to label on both the Y and X axes the values for each part of EITC. That is, at how many weeks of work does the phase-in end; what will our worker earn? At how many weeks of work does the phase-out begin and end; how much does our worker earn at each point? (c) (2 points) Now assume that this worker was initially working 36 weeks before EITC was enacted. Draw an indifference curve showing this point and label the curve UN and the point N. Now draw another indifference curve for the same worker assuming that EITC legislation has just passed. Label this curve UE and her preferred bundle of Leisure and Consumption point E. After EITC is passed, do you think she’ll work more, less or the same? Show this and say why.

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