Price impacts: Complements and substitutes
Income impacts: Normal and inferior goods
Policy: Income transfers and price subsidies
An increase in income due to a government transfer shifts the budget constraint from I1 to I2. This parallel shift increases the quantity consumed of the target good (daycare) and other goods, unless one is inferior.
A subsidy to the targeted good, by reducing its price, rotates the budget constraint from I1 to I2. This induces the consumer to direct expenditure more towards daycare and less towards other goods than an income transfer that does not change the relative prices.
A price subsidy to the targeted good induces the individual to move from E1 to E2, facing a budget constraint I2. An income transfer that permits him to consume E2 is given by ; but it also permits him to attain a higher level of satisfaction, denoted by on the indifference curve U3.