Suppose that the Earned Income Tax Credit is set up so that amaximum payment of $3,000 can be earned when a qualified workerearns $10,000. This payment represents a subsidy of 30 cents foreach additional dollar earned up to $10,000.
Workers earning between $10,000 and $14,000 are eligible for themaximum payment. Once labor market earnings exceed $14,000,additional earnings reduce the subsidy by 45 cents for each dollarearned.
The going wage rate is $10 per hour.
Will a person working between working less than 1000 hours inthe labor market experience an income effect, a substitutioneffect, or both as a result of the EITC?
