Final answer:
The Earned Income Tax Credit (EITC) can increase the utility of individuals outside of the labor market and incent them to enter the labor market. The utility-increasing effects of the EITC can differ based on the slope of the indifference curves of individuals. Individuals with more vertically sloped indifference curves might be less likely to enter the labor market compared to those with horizontally sloped indifference curves.
Step-by-step explanation:
The Earned Income Tax Credit (EITC) is a government program that provides a refundable tax credit to low-income working individuals. It is designed to incentivize individuals to enter the labor market by offering financial benefits. When an individual is currently outside of the labor market and consuming at point V (representing their non-labor income), the EITC can increase their utility and encourage them to enter the labor market.
Using indifference curves, we can visually represent the utility of an individual in different scenarios. If the indifference curves are more vertically sloped, it means that the person values leisure time more than earning income. In this case, the EITC would have less utility-increasing effects on their decision to enter the labor market compared to someone with horizontally sloped indifference curves, who values income more than leisure.
Therefore, the incentive effects of the EITC on individuals outside of the labor market can vary depending on their preferences and the slope of their indifference curves.