Question

1.Suppose that the government provides a subsidy of $300 per month for all families with children. Consider a mother with a preschool-age child who is currently not employed. How would this subsidy affect her decision to work, all else equal? Explain with the aid of a figure explaining the shift in budegt line and indiference curves

2. Suppose that the government provides a subsidy of $300 per month for all families with children. Consider a mother with a preschool-age child who is currently employed. How would this subsidy affect the number of hours that she chooses to work (assuming she can vary them), all else equal? (Figure not required).

Answer 1

SOLUTION:

The solution of this question must be appropriate if explained diagrammatically.

In the first case, the Subsidy provides relief for the mother, as she has an UNEMPLOYED son. She may choose comparatively higher leisure as before, however, may not choose to reduce her work by a huge extent. So, we can expect the change in Leisure > Change in Income. (Here income means the Work)

Thus, we see in the first figure that after the Subsidy the budget line moves outwards. The mother now moves to a higher IC, indicated by IC₁ as compared to initial IC₀.

Thus, we know that higher IC means more satisfaction and Utility than before.

However, due to the son being Unemployed she cannot stop work. So, we see that as Leisure increases, her work also increases, however by a ver small amount. Thus,

ΔL > ΔI, i.e. Change in Leisure > Change in Income.

Another possibility can be seen in the second figure, where the Work remains the same, however the Leisure increases as she earns more than before, due to the Subsidy (Non-Wage Income), and she is also on a higher IC as compared to before.

However, this situation is more appropriate for the second answer where we see that the son is EMPLOYED.

Thus, in this case she can choose to not increase her working hours at all and just enjoy the Leisure. Thus we see that Leisure increases, however Income (indicating Working Hours or Work) remains same as before, and she is on a higher IC.

The last possibility is also possible but is appropriate for the second case. If she son earns a largely sufficient amount to support the family, then the 300 dollar subsidy for the mother might be just a mere amount. In that case, as we see in figure 3 the mother may choose to reduce her work hours and enjoy leisure, even more than she did in the second diagram. Thus, figure 3 shows a highly possible situation where her income (indicating work hours or work) can reduce, and Leisure can increase in a huge proportion.

Find the figures below.

Thus, wee see that all the cases can be answered using the following set on diagrams and answers.

The most appropriate however, will be the second figure, where Income (work hours or work) remains same however, leisure increases. This is a typical subsidy situation that is seen in several cases.

However, in almost every case, the Subsidy leads to a SHIFT upwards of the Budget Line, indicating increased Endowment, and a high IC indicating higher Utility than before due to the subsidy.