Consider a household of one parent and one child

Subject:EconomicsPrice: Bought3

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Consider a household of one parent and one child. The household has $50/week worth of non-labor income. The parent earns $10/hour in the labor market. The parent has 80 hours a week available to split between home time and labor market time.

The government adopts an Earned Income Tax Credit for weekly income as follows:

• Households with any children and labor income (LI) of $0-$400 receive a tax credit of 0.1*LI
• Households with any children and labor income (LI) of $400-$500 receive a tax credit of $40
• Households with any children and labor income (LI) of $500-$700 receive a tax credit of $40-
• (0.2*(LI-$500))
• Households without a child or with labor income above $700/week are ineligible for the tax credit

1. Draw the household budget constraint both before and after the EITC.

For the next two questions, assume a household where the parent did not work before the adoption of the EITC.

1. How will the EITC affect this household's participation at the extensive and intensive margins? Explain your answer verbally or graphically.
2. Suppose this parent has a partner who earns $400 in labor income per week. The partner's labor supply is inelastic and does not respond to the EITC. The partner does not have any additional children. How will the amount of the tax credit the family receives if the parent and partner marry? Does the EITC incentivize this couple to marry?

For the next two questions, assume a household where the parent worked between 50 and 60 hours before the adoption of the EITC.

1. How will the EITC affect this household's participation at the extensive and intensive margins? Explain your answer verbally or graphically.
2. Suppose this parent has a partner who earns $400 in labor income per week. The partner's labor supply is inelastic and does not respond to the EITC. The partner does not have any additional children. How will the amount of the tax credit the family receives if the parent and partner marry? Does the EITC incentivize this couple to marry?