There has been a renewed interest in raising the federal minimum wage in the US, with some members of Congress calling for an increase to $15 an hour.

Some opponents to the minimum wage suggest that the Earned Income Tax Credit (EITC) is a better policy. This question explores the EITC.

Low-wage workers receive additional income from the federal government depending on how much they earned and how many children they have. Consider an individual with one child:

• there is no credit if nothing was earned.
• the credit equalled $.34 per dollar earned and peaked at around $3050, when the worker earned $8950.
• it remained at $3050 until the worker earned around $16450
• it was phased out gradually, by $.16 per dollar earned, until eliminated completely if the worker earned $35525 or more per year.

Carefully draw and label a diagram with this new budget curve, as well as the budget constraint from (a).

Budget constraint from part 1

T= number of hours W = hourly salary TW = maximum earnings h As le incom leisure tw INCOME income t HOURS LEISURE + LABOURE