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2. EITC, Consumption and Leisure Consider our static neoclassical labor supply model that we have used in class, where individuals derive utility from consumption and

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2. EITC, Consumption and Leisure Consider our static neoclassical labor supply model that we have used in class, where individuals derive utility from consumption and leisure [ : u(c,l) . They have time endowment T and earn a wage rate w. Before any taxes or transfers are introduced, all consumption is finance from earnings: w - h A) Write down the budget constraint and optimizing condition B) Graph the budget constraint from part A). Label your axis and intercepts C) Suppose the government now offers the Earned Income Tax Credit (EITC) with a phase-in rate of a for earnings below zj, a flat credit amount for earnings between z;and zg, and a phase out rate 7 for earnings above zy until the credit is fully phased-out. Graph the budget constraint with the EITC overlayed on your budget constraint from part B, label your axis, and the slope(s) of your EITC schedule. D) For each segment of your EITC schedule, note if there is: A subsitution effect An income effect And the relevant sign (+ / - / or ambiguous)

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