Question

Using a well-labelled diagram, explain how a shift in preferences towards a situation where parents derive less utility from children can affect the optimal fertility decisions.

Answer 1

Assume that parents prefer children and other goods. Wage earned by them determines the number of children and units of other goods preferred. More hours at work implies fewer hours available at home to raise children. Thus, the wage is an opportunity cost of raising children.

Assume that wage rises. The effect of this rise in wage can be decomposed into two effects (assuming children as normal goods)-

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• Substitution effect (s.e.) - Increase in wage implies increase in relative price of children. As a result, parents will prefer less children. And rise work hours, increasing the consumption of other goods. This is shown in figure (1) below. The number of children falls from X to X’.
• Income effect (i.e.)- Fall in purchasing power leads to decline in consumption of normal goods. As a result, number of children falls further from X’ to X” as shown in the figure (1).

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Thus, it can be concluded that parents prefer a smaller number of children when wage rate rises. As a result, optimal number of children reduces from X to X".

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