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The Earned Income Tax Credit: During the Clinton Administration, the Earned Income Tax Credit (EITC) was expanded considerably. The program provides a wage subsidy to low-income family through the tax code in a way similar to this ex: Suppose you can earn $5 per hour. Under EITC, the government supplements your first $20 of daily earnings by 100% and the next $15 in daily earnings by 50%. For any daily income above $35, the government imposes a 20% tax. Suppose you have at most 8 hours of leisure time per day.

PartA: Illustrate your budget constraint (with daily leisure on the horizontal and daily consumption on the vertical axis) under this EITC.

PartB: Suppose the government ends up paying a total of $25 per day to particular worker under this program and collects no tax revennue. Identify the point on the budget constraint this worker has chosen. How much is he working per day?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M971390

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