(3) Consider Eleanor who makes $10 per hour. Consider the following rules of the EITC for a family with 2 children in 2012. It is allowed a tax credit equal to 40 percent of all wage and salary income up to and including $13,090. The benefit is phased out at incomes greater than $17,090 and less than $41,952. For each dollar of earnings in this phase-out range, the credit is reduced by 21.06 cents. At $41,952 of earnings, the credit is entirely exhausted.
(a) 1 point. What is the maximum credit Eleanor can receive?
(b) 1 point. How much do Eleanor's earnings increase when her labor supply increases from 0 to 1,000 hours per year?
(c) 1 point. How much do her earnings increase when her labor supply increases from 1,000 to 1,500 hours per year?
(d) 1 point. How much do her earnings increase when her labor supply increases from 1,500 to 2,000 hours per year?
(e) 3 points. In each case (a, b, and c), compute the incremental amount of earnings associated with the increase in hours worked.
(f) 1 point. Draw Eleanor's budget constraint without the EITC benefits. Assume she has no non-labor income and she can get a maximum of leisure time of L=110.
(g) 4 points. Draw Eleanor's budget constraint with the EITC benefits.
(h) 2 points. Draw a vertical line on your graph in (f) when Eleanor works 1000 hours per year. What is the slope of the budget constraint with EITC benefits there?
(i) 2 points. Draw a vertical line on your graph in (f) when Eleanor works 1,500 hours per year. What is the slope of the budget constraint with EITC benefits there?
(j) 2 points. Draw a vertical line on your graph in (f) when Eleanor works 2,000 hours per year. What is the slope of the budget constraint with EITC benefits there?
(k) 2 points. Suppose Eleanor did not work in the absence of the EITC. How does the EITC affect her work incentives? Explain why.
(l) 2 points. Suppose Eleanor worked 1,000 hours in the absence of the EITC. How does the EITC affect her work incentives? Explain why.
(m) 2 points. Suppose Eleanor worked 1,500 hours in the absence of the EITC. How does the EITC affect her work incentives? Explain why.
(n) 2 points. Suppose Eleanor worked 2,000 hours in the absence of the EITC. How does the EITC affect her work incentives? Explain why.