Consider a program similar to the Earned Income Tax Credit (EITC) which works in the following manner. If you have no earnings, you are not eligible for the program. Once you earn any money, you receive an increasing amount from the government, up to the point where you earn $20,000, where the subsidy is equal to $2,000. The subsidy then declines, reaching zero when you earn $40,000. Since the program is designed to help low-wage workers, for this problem assume that the relevant market wage is $10 per hour, and that an individual can work between 0 and 4000 hours a year.

a. Draw the budget constraint in effect with and without the program (put annual hours of leisure rather than daily hours on the horizontal axis). Show the optimal consumption choice for an individual who works 3000 hours per year in the absence of the program. What will be the effect 2 of the program on this persons labor supply? Explain, and show this persons new choice on your graph. (Hint for drawing the budget constraint with the program: as usual, first find the two intercepts of the budget constraint. Then find the hours of leisure that correspond to earning $20,000, and add the $2,000 subsidy to the $20,000. You will have a kinked budget constraint.)

b. What will be the effect of the program on the labor supply of a person who works 1000 hours per year in the absence of the program? Explain, and show this persons original choice and new choice graphically.

c. What will be the effect of the program on the labor supply of a person who works zero hours in the absence of the program? Explain, and show this persons choices graphically.