Day care is a serious problem for many families. Legislators are aware of the increasing demand...

Day care is a serious problem for many families. Legislators are aware of the increasing demand by working parents of young children to do something about day care. Assume you are evaluating two subsidy programs.

Program 1: A family receives a per unit subsidy for each day a child attends an authorized day care facility.

Program 2: Each family with a child registered in an authorized day care facility receives a lump sum subsidy.

An association which represents day care providers actively lobbies for program 1 and is very much against program 2. Legislators tell the association that both programs will cost taxpayers the same amount of money. Using your knowledge of consumer theory, can you provide a possible explanation for the legislators for why day care providers may be so adamant in their support of program 1? (Assume preferences are normal, using days of day care on the horizontal axis and all other goods on the vertical.)

Expert Solution

Program 1 results in a change in the slope of budget line (ability to buy more units of day care days) and program 2 shifts the budget line upwards parallel to the original one. We can see that program 2 may make the consumers spread the extra budget they have over other goods, as compared to program 1.

Rahul Sunny answered 2 years ago

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