Reference no: EM132794991

Consider a single parent who receives a weekly non-labor income of 200 dollars per week, has a weekly time endowment of T = 60 hours, and has an hourly wage of 10 dollars.

2a) Draw the budget set for this individual. Plot the optimal allocation and the indifference curve, assuming the parent chooses to work 20 hours per week. Carefully label the axes and all relevant points.

2b) Now consider a new scenario such that if this parent chooses to work at all, then daycare will cost a fixed amount of 100 dollars per week. If the parent does not work at all, then daycare is not needed. Make a graph of the new budget line. Suppose this parent has a low taste for work (i.e. a high marginal utility of leisure). How do you think her choice of labor supply would change in the presence of childcare costs?

2c) How would your answer to part 2b change if the parent had a very high taste for work (i.e. a low marginal utility of leisure)? Explain the change in labor/leisure in terms of income and/or substitution effects. Add a graph.