1) [4 points] The Earned Income Tax Credit is a popular refundable tax credit which provides assistance to low- and moderate-income people. You only receive the EITC if you work. For families with one child, a modified version of the program is as follows:
- For every dollar of annual income earned up to $8000, the EITC pays a benefit of 35 cents up to a maximum credit of $2800.
- Between annual incomes of $8000 and $16,000, the credit remains constant at $2800.
- The program must eventually phase out, so for every dollar earned over $16,000, the benefit decreases by 14 cents. In other words, the benefit is taxed away at a rate of 14%.
Answer the following questions using graph and explaining your answers intuitively. Please draw the graphs clearly (making them large will help) and label everything.
a) Draw the annual budget constraint for someone earning $800 per week (assuming no EITC). Put weeks per year on the X-axis (this is different from the example in class). The x-intercept should therefore be 52. The Y-axis is annual income. Draw in typical convex indifference curves for someone who enjoys both leisure and income. Indicate on your graph the utility-maximizing number of weeks of leisure this person will enjoy. How many weeks per year will this person work?
b) Now draw the budget constraint for the person above assuming they are eligible for the EITC. Make sure to identify coordinates for all kink points on your budget constraint. At what income level is the benefit equal to zero?
c) Draw in similar indifference curves as you drew in part (a). What is the EITC’s impact on weeks worked and annual income? Does this seem like a successful program?
d) Suppose the government decided no one earning an income over $25,600 should receive an EITC credit. At what rate must the benefit now be taxed away? What impact will have this on the incentive to work? Discuss the trade-off between the expense of providing benefits to relatively high incomes with the problems associated with a high tax rate.
e) Economists like the EITC compared with other welfare programs. Compare the results (assistance provided to deserving families and work incentives) you got from the EITC with a program that provides a guaranteed minimum income of 10,000 (regardless of number of weeks worked) but pays nothing for people earning over $10,000.
2) [3 points] How would each of the following developments affect the amount of labor the typical profit-maximizing textbook publishing company hires in the short run? You should assume the markets for textbooks and labor are both perfectly competitive and that our typical textbook publisher must pay the going wage rate for labor. Use graphs to explain your answer.
The number of people going to college increases, meaning more students must buy textbooks.
Increased technology allows workers at textbook publishers to become more productive.
Now consider the decision our textbook publisher makes in the long run. Suppose the company is initially using the profit-maximizing combination of labor and capital.
c. Textbook publishers also use computers and software (capital) to make their products. Suppose the price of capital equipment rises. What will happen to labor demand in the long run? Why?
3) [1 points] Suppose a union at a factory is considering bargaining for a large wage increase. The union cares about the wage rate, but also about the aggregate earnings of all factory workers. What are some factors the union should consider before pushing for the wage increase?
4) [2 points] Suppose the market price for a taxi ride is $10 per ride. On rainy days, there is enough demand for a taxi driver to provide 6 rides per hour. On clear days, demand for taxis is slower and he can only provide 3 rides per hour. Every day, the taxi driver must decide how many hours to work. If he works more hours on rainy days, what can you conclude about the relative income and substitution effects? What would his labor supply curve look like? What if he works more on clear days?
Subject | Business |
Due By (Pacific Time) | 09/17/2014 12:00 pm |
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