Question

Longer Answer required for this question. Ivanka Trump likes to talk about the costs of child care. "The single largest expense in over half of American households is child care, even exceeding the cost of housing," she said earlier this year (though Politifact later raised some questions about this statement). The policy she's promoting is an increased child tax credit. Another way to reduce the cost of childcare is to offer a government subsidy that would reduce the price of a unit of childcare.

Let a unit of childcare be an hour of childcare per child.

a) Do you think a unit of childcare is a normal or inferior good? Explain your answer.

b) Using an indifference map complete with budget constraint, graph the effect of a decline in the price of a unit of childcare (keeping in mind what kind of good you believe a unit of child care to be). Graph units of child care on the horizontal axis and composite consumption good "C" on the vertical axis.

c) Using your diagram drawn in part b, decompose the effect of this alternative policy, childcare subsidy, that you have drawn into the substitution and income effect. Explain your additions to your diagram. (2 Point) State whether the substitution and income effects are positive or negative. Your answers and graphical additions should correspond correctly with your answer to part a.

d) According to your diagram, did the modeled consumer's expenditures on units of child care increase or decrease when the price of a unit of childcare decreased. Explain briefly.

e) How does this policy compare to the one proposed by Ivanka Trump?

Answer 1

a) Childcare cannot be an inferior good, as a large part of income gets spent on childcare. Therefore, it's a normal good.

b) With the decrease in the price of a unit of childcare unit, the consumption of child care units will increase and the consumption of composite good will decrease.

c)

d) The total spending on the child care units after the decrease in the price of the child care units decreased will remain the same. With the decrease in the price of childcare units, the consumption of child care units will increase.

e) In this policy the cost of childcare unit has decreased. However, Ivanka Trump talks about the policy of increased child tax credit. This policy talks about to increase the tax in child care units. With the increase in tax for child care units, consumers will buy less of child care units.