In most states,there is a mandatory maximum number of children allowed per day care worker.If this maximum number is binding,then,if the wage of day care workers goes up,the main effect on day care employment will be
A) through the scale effect.
B) through the substitution effect.
C) equally shared between the substitution and scale effect.
D) through neither the scale nor the substitution effect, as labor demand will not change.

Question

Quizplus · Accepted Answer

The main effect on day care employment will be through the scale effect because the mandatory maximum number of children per day care worker limits the ability of day care centers to substitute capital for labor. When wages go up, the cost of providing day care services increases, potentially leading to a reduction in the quantity of services demanded (scale effect) rather than changing the ratio of labor to capital (substitution effect).

In Most States,there Is a Mandatory Maximum Number of Children