The substitution effect:
A)predicts that taxpayers will work harder to pay for consumer products when tax rates increase.
B)is one of the effects considered in static forecasting.
C)results in the government collecting more aggregate tax revenue than under the income effect.
D)is typically more descriptive for taxpayers with lower disposable income.
E)None of the choices are correct.

Question

Quizplus · Accepted Answer

The substitution effect, in the context of labor and taxation, generally refers to the change in labor supply due to a change in the relative price of leisure versus labor (work) when wages change, not directly to how taxpayers respond to tax rate changes in terms of working harder or the government collecting more tax revenue. None of the provided choices accurately describe the substitution effect as it is understood in economic theory.

The Substitution Effect