1. (3+5+20+7=35 pts) In 1997 the Quebec provincial government opened a large number of highquality, subsidized daycare centers for preschool children. The price of the daycare was $5 per day for eight hours of care, far less than the market rate in the few existing daycare centers. (a) Child care was for the most part considered the responsibility of the mother rather than the father. Therefore, what effect did this new policy have on mothers' potential or actual effective daily wages? (b) Therefore, what would the effect of the policy have been on mothers' labor force participation? (0) Use a well labelled diagram to show the effect of the policy on mothers who were already working. Show the decomposition into substitution and income effects, and provide some intuition. ((1) Suppose the Quebec government began charging an hourly rate of 62.5 cents per hour instead of a daily rate of $5. Would this change mothers' work habits? If so, how? 2. (10+10=20 pts) A lighthouse warns shing boats away from treacherous rocks. In earlier times, private lighthouses would turn on their signals only for those ships whose owners had paid a fee to the lighthouse. Suppose that different levels of service can be provided by a lighthouse, resulting in different probabilities that a boat will be warned of its nearness to the rock. For example, the more powerful the beacon (or signal) emitted by the lighthouse, the higher the probability that a boat will receive the warning. However, once the light is turned on, all boats in the area benet. The marginal cost (M C) of attaining various probabilities (Q) is M C = 2Q. There are two boats in the area, one owned by the pirate captain Madame Cheng, and the other owned by the pirate capitain Calico Jack. Their individual demand functions for the service are: Cheng: P: 10Q (1) Calico: P = 10 :Q (2) (a) What is the socially optimal level of service, and how much is it worth to each pirate captain? Carefully draw relevant equations on a diagram with price on the vertical axis and level of service (Q) on the horizontal axis. (b) The lighthouse is privately owned, however. Assume that each pirate captain will willingly pay to the lighthouse owner the value he (the captain) gets from the service, and not try to freeride. What level of service will the free market provide, and how much will each pirate captain pay? Add relevant information to the diagram from a)