# Consider Eleanor who makes \$10 per hour

(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.

# Consider Eleanor who makes \$10 per hour

(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.