Problem 2. Now, this conventional welfare program was replaced by the Earned Income Tax Credit program in 1997. Under the new program, the benefit is calculated as a fixed percent of the earnings of low income families. That is to say a poor family will get Y * from the program, where Y is their income and is the percent for calculating the benefit. For example if the benefit is 15% and the familys income is $100 then they will receive from the program $15 from the program. A family qualifies for this program if they are poor (make less than income Y before the aid is given).

A. Draw this new budget constraint, making sure you label all important values on your graph.

B. Explain and show on your graph why this new design helps to encourage labor supply among the poor (those who make less than income Y before the aid is given).

C. What does this program do for labor supply for those who are not poor (those who make more than income Y before the aid is given).