Question

If children increase the reservation wage of women (since it is only worthwhile to work if wages exceed the cost of childcare), what is the predicted e ect of children on the duration of job search and expected wage once employed for women with young children? If the government decides to subsidize child care, lowering the cost of child care and thereby lowering the reservation wages of women with young children, what e ect would the subsidy have on the duration of job search and expected wage once employed compared to the world with no subsidy?

Answer 1

A subsidy is an amount of money given directly to firms by the government to encourage production and consumption. A unit subsidy is a specific sum per unit produced which is given to the producer.

The effect of a specific per unit subsidy is to shift the supply curve vertically downwards by the amount of the subsidy. In this case the new supply curve will be parallel to the original. Depending on elasticity of demand, the effect is to reduce price and increase output.

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