Homework 5

# Homework 5 - Economics 1480 Homework #5 1) Rosen Chapter...

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Economics 1480 Homework #5 1) Rosen Chapter 12: problem 2 2) Rosen Chapter 12: problem 3 3) Rosen Chapter 13: problem 1 4) Earned Income Tax Credit and Labor Supply Suppose that Lola is deciding how many hours (H) to work. She can either work full- time (H=40), part-time (H=20), or not at all (H=0). For simplicity, assume that prior to any taxes or transfers, Lola’s wage rate (w) is \$1. Lola receives linear utility from consuming her labor market earnings (C = wH) and from leisure (L = 40 H): U = C + 1.25L a) In the absence of the earned income tax credit, how many hours will Lola choose to work? To answer this question, calculate her utility under each of the three options for hours spent in the labor market (0, 20, or 40). b) Now, suppose that the government implements an earned income tax credit schedule: EITC = 0.5 × labor market earnings for weekly earnings up to \$20 Between \$20 and \$40 of weekly earnings, the credit is phased out at the same rate it was phased in. Thus, the credit is fully phased out once weekly earnings reach \$40. Given her three choices for hours, note that Lola only receives the EITC benefit if she works 20 hours. At zero hours she is not eligible and at 40 hours the benefit is fully phased out. After the implementation of the EITC program, how many hours will Lola choose to work? Provide a brief explanation for any differences from part a).

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c) Re-do part a) (the no EITC case) for the case in which Lola’s places less utility weight on leisure: U = C + 0.75L d) Re-do part b) (EITC) for the case in which Lola’s places less utility weight on leisure: U = C + 0.75L. Explain any differences from your answer in part c). 5) Read the article “After 40 years, what are some results and lessons of America’s war on poverty” (New York Times, January 8, 2004) a) Describe the problems with the current measure of the poverty rate? Do these problems tend to understate or overstate the poverty rate? b) Assuming that we can measure poverty accurately, describe policies that the federal government could implement in order to reduce the poverty rate.
1 of 1 DOCUMENT The New York Times January 8, 2004 Thursday Late Edition - Final Economic Scene; After 40 years, what are some results and lessons of America's war on poverty? BYLINE:

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## This note was uploaded on 07/22/2010 for the course ECON 1480 taught by Professor Knight during the Spring '10 term at Brown.

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Homework 5 - Economics 1480 Homework #5 1) Rosen Chapter...

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