Suppose the Earned Income Tax Credit gives workers 40% of

  1. Suppose the Earned Income Tax Credit gives workers 40% of their earnings for earnings up to a maximum tax credit of $4800, then begins to reduce the credit by 20% for every dollar of earnings above $21,000. For an individual who earns $15 an hour and can work a maximum of 4000 hours in a year
    1. Draw the budget constraints before and after this EITC goes into effect. Label the number of hours of work and money income for each kink in the budget constraint.
    2. Draw indifference curves before and after the EITC goes into effect for 4 people:
      1. A does not work at all before the EITC goes into effect
      2. B works 1200 hours
      3. C works 2000 hours
      4. D works 3500 hours
    3. Explain the income and substitution effects of the EITC on these 4 people
    4. State how hours of work and money income will change (more, less, no change)

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