In: Economics
For this problem, we will be working with an annual labor supply decision (rather than weekly). This means the person will have 5,000 hours available to spend on labor/leisure (50 weeks * 100 hours per week). We will explore the life and labor supply decisions of Sully. Sully is a single father of 2 that lives his life a quarter mile at a time. Suppose Sully can currently earn a wage of $10 per hour in the labor market. Because of his 2 beloved - though troubled - children, he is eligible to earn a tax credit (if he qualifies based on income level). The tax credit program for individuals with 2 kids has the following features:
Hours Worked (annual) |
Earned Income |
Amount of Tax Credit earned |
Total Spending Money |
Effective hourly wage |
0 |
0 |
0 |
0 |
-- |
500 |
||||
501 |
||||
1000 |
||||
1001 |
||||
2000 |
||||
2001 |
||||
0 |
||||
5000 |
3 points) Suppose that the tax credit program exists, but is instead structured as: $0 to $10,000 a 50% tax credit is earned, and at $10,000 or more in income payback of the credit occurs at a 20% rate. Show the budget constraint for this program (and label the key points). Discuss how this might affect Sully’s labor supply decision differently as compared to the program in parts a and b.
4 (4 points) Now suppose the tax credit program is structured as follows: $0 to $10,000 a 50% tax credit is earned, and at income of over $10,000 the person does not qualify for any tax credit. This means anyone making more than $10,000 in annual income is not eligible for the program at all. Show the budget constraint for this program (and label the key points). Discuss how this would affect Sully’s labor supply decision as compared to the other versions of the program. Summarize what this type of modeling means about how to structure income support programs.