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Suppose that the Earned Income Tax Credit is set up so that a maximum payment of...

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Economics

Suppose that the Earned Income Tax Credit is set up so that amaximum payment of $3,000 can be earned when a qualified workerearns $10,000. This payment represents a subsidy of 30 cents foreach additional dollar earned up to $10,000.

Workers earning between $10,000 and $14,000 are eligible for themaximum payment. Once labor market earnings exceed $14,000,additional earnings reduce the subsidy by 45 cents for each dollarearned.

The going wage rate is $10 per hour.

Will a person working between working less than 1000 hours inthe labor market experience an income effect, a substitutioneffect, or both as a result of the EITC?

Answer & Explanation Solved by verified expert
3.7 Ratings (494 Votes)
As per the given scenario regarding EITC there are usually 3 phases Phase 1 Phase in period Those working less than 1000 hours or not working at all will be incentivized to work more hours or join labour force They will be induced to earn atleast 10000 or more causing a rise in no of available    See Answer
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