The Earned Income Tax Credit gives workers 20% of their earnings for earnings up to $12,000 and begins to reduce the credit by 33% for every dollar…

The Earned Income Tax Credit gives workers 20% of their earnings for earnings up to $12,000 and begins to reduce the credit by 33% for every dollar of earnings above $16,000.  For an individual who earns $12 an hour and can work a maximum of 4000 hours in a year

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.

Draw indifference curves before and after the EITC goes into effect

Explain the income and substitution effects of the EITC

State how hours of work and money income will change (more, less, no change)

for 3 different people.  A does not work at all before the EITC.  B works 1200 hours.  And C works 2000 hours.

 
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