If Marcel, who recently received an increase in wages, decides to work fewer hours, the _____ effect for leisure outweighs the _____ effect for him.
A) income; complementary
B) substitution; income
C) complementary; elasticity
D) income; substitution

Question

Quizplus · Accepted Answer

The income effect occurs when an increase in wages makes a person feel wealthier, so they may choose to work less and enjoy more leisure time. The substitution effect occurs when an increase in wages makes leisure relatively more expensive compared to work, encouraging more work hours. If Marcel decides to work fewer hours, it means the income effect (feeling wealthier and thus choosing more leisure) outweighs the substitution effect (the incentive to work more due to higher wages).

If Marcel, Who Recently Received an Increase in Wages, Decides