Question 3

Suppose it costs K dollars per year to pay for childcare. Suppose the government introduces a subsidy that reduces the cost to K'.

a) Graph the budget constraint without the policy (without the cost subsidy), illustrating on the graph the role of K (the daycare cost), the weekly market wage rate w, weekly hours and assume the individual already possesses a yearly non labour income Yn and it is positive. On the same graph, illustrate the change in the budget constraint once the subsidy is introduced.

b) Show graphically if and how the subsidy will affect the labour supply. Make sure you provide a complete answer including considerations of labour supply at the extensive and intensive margins (corner and interior solutions) before and after the daycare subsidy.