Suppose that Elmer's hourly wage increases, and he decides to work fewer hours. For Elmer, the substitution effect of the wage change is
A)only partially offset by the income effect.
B)more than offset by the income effect.
C)exactly offset by the income effect.
D)We do not have enough information with which to answer the question.

Question

Quizplus · Accepted Answer

When Elmer's hourly wage increases, it becomes relatively more expensive to enjoy leisure time as opposed to working. Therefore, Elmer will likely work more hours due to the income effect. However, the substitution effect of a higher wage causes Elmer to work fewer hours because they can now achieve their income goals by working fewer hours at a higher wage rate. This means that the income effect is more significant than the substitution effect, resulting in Elmer working fewer hours overall.

Suppose That Elmer's Hourly Wage Increases, and He Decides to Work