Suppose that the government introduces an Earned Income Tax Credit such that for the first $4,000 in earnings, the government pays 50 cents per dollar on wages earned. For the next $2,400 of earnings, the credit is held constant at $2,000, and after that point the credit is reduced at a rate of 25 cents per dollar earned. When the credit reaches zero, there is no additional EITC.

1. 2 Draw the budget constraint that reflects this tax credit for a worker who can work up to 4,000 hours per year at an hourly wage of $8 per hour. Assume the worker has no other source of income and faces no other taxes. Will a worker earning $8 per hour and working full time, which is 2000 hours per year, receive the EITC?
2. Describe in words the income and substitution effects on labor supply from the introduction of the EITC on the phase-out portion of the budget set.
3. The government expands the EITC such that for the first $8,000 in earnings, the government pays 50 cents per dollar on wages earned. For the next $2,400 of earnings, the credit is held constant at $4,000, and after that point the credit is reduced at a rate of 20 cents per dollar earned. Draw the budget constraint under both the new and old EITC (note: the old EITC is the budget constraint you drew in part #a). Will a worker earning $8 per hour and working full time, which is 2000 hours per year, receive the new EITC?