Problem:

Imagine that the state government presently provides no child care subsidies to working single parents, however that it now wants to adopt the plan which will encourage labour force participation between single parents. Imagine that child care costs are hourly, and assume the government adopts the child-care subsidy which pays $3 per hour for each hour parent works, up to eight hours per day.

Required:

1. Sketch a current budget constraint for the assumed single mother (net of child care costs) who loves leisure.

2. Sketch the new constraint. Illustrate the likely consequences on labour force participation and hours of work.