Suppose day-care centers charge by the hour (with no daily fixed costs).The government then subsidizes day-care,cutting the hourly cost.Assume the income effect dominates the substitution effect for working mothers.The effect of the subsidy will be to ________ the labor force participation rate of parents with small children and to ________ the work hours of working parents with small children.

Question

Quizplus · Accepted Answer

When the income effect dominates the substitution effect, a subsidy that lowers the hourly cost of day-care would increase the labor force participation rate (as it becomes more financially feasible for parents to work), but decrease the work hours of those already working (as they can now afford to work less and still meet their financial needs due to the lower cost of childcare).

Suppose Day-Care Centers Charge by the Hour (With No Daily