Barry's wage increased and he responded by working more hours. Which of the following must be true?
A) Leisure is an inferior good.
B) The substitution effect of the wage increase dominated the income effect.
C) The income effect of the wage increase dominated the substitution effect.
D) The substitution and income effect both increased hours of work.

Question

Quizplus · Accepted Answer

When Barry's wage increased, the substitution effect (which encourages more work as the opportunity cost of leisure rises) dominated the income effect (which might encourage less work as Barry can maintain the same income with fewer hours).

Barry's Wage Increased and He Responded by Working More Hours