Economics Question

Problem 2: Welfare and the EITC. Throughout this problem, we will consider the labor supply decisions of three workers: Anna (A), Beth (B), and Cindy (C). Each worker has 2,000 hours to spend on leisure and labor, and each worker faces the same hourly wage rate of $17.50. 1. With no welfare and no tax credit program, Anna works 200 hours, Beth works 1,050 hours, and Cindy works 1,800 hours. Draw the common budget line with leisure on the horizontal axis and labor on the vertical axis. Plot and label Anna's choice A, Beth's choice B, and Cindy's choice C. 2. The government introduces a TANF program with a benefit guarantee of $10,000 and a benefit reduction rate of 50%. a) Draw the new budget line with the TANF program. Plot and show a possible change in each worker's optimal choices before and after the TANF program is introduced. b) What is the effect of the TANF program on the labor supply for each worker? 3. In an attempt to reduce moral hazard, the government eliminates the TANF program and introduces the following EITC program: . Those earning less than $5,000 get a tax credit equal to 100% of earned income. . Those earning between $5,000 and $10,000 get the maximum $5,000 tax credit. . Those earning between $10,000 and $20,000 the credit phases out at a 50% rate. . Those earning over $20,000 get no tax credit. Anna, Beth, and Carla are all eligible for this EITC program. a) Draw the new budget line with the EITC program. Plot and show a possible change in each worker's optimal choice when the government switches from EITC to TANF. b) What is the effect of changing from the TANF program to the EITC program on the labor supply for each worker