Cost of child-care is equivalent

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Frank is a single-father with one child. The cost of child-care is equivalent to $150 per day. When Frank works, he receives an hourly wage of $20. In addition he has $150 of non-labor income per day. He sleeps 8 hours a day. Given these constraints, Frank chooses not to work. Suppose now that the government wants to guarantee a $100 daily income level for single-parents who work (i.e., the government subsidizes the gap between $100 and the daily earnings). Draw in a unique diagram (clearly labeled) the pre subsidy and the post-subsidy budget line faced by Frank. Will he be more likely to work after the introduction of the subsidy? What if the $100 subsidy is phased out linearly so that the value of the subsidy is $100 if earned income is $0, and it is equal to $0 when earned income is equal to $250? Draw in a unique diagram (clearly labeled) the pre-subsidy and the post-subsidy budget line faced by Frank. Will he be more likely to work after the introduction of the subsidy?

Reference no: EM13800525

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