1. A. Verbally describe the Earned Income Tax Credit (EITC).. How does one gain from the EITC?

B. Explain vertical equity in income redistribution. Explain how the EITC sometimes violated vertical equity in income redistribution.

C. Draw a labor-leisure diagram, following the 80 hour per week convention.

Budget Line 1 = No EITC. Only wage income.

Budget Line 2 = Both EITC and wage income are paid.

Label fully.

Use indifference curves to show a person who chooses to work more hours per week on budget line 2 than on budget line 1. Is this the income effect or is it the substitution effect more strongly causing the choice to work more hours? Explain the results.

Answer all parts!