If one worker suppliers fewer hours of labor when wage increases,we can conclude that ________.
A) the substitution effect is greater than the income effect
B) the income effect is greater than the substitution effect
C) the income effect is the same as the substitution effect
D) this worker is not efficient.

Question

Quizplus · Accepted Answer

According to the law of demand, when the wage rate increases, the opportunity cost of leisure time increases, and therefore, the worker will tend to substitute leisure time with work hours. This is the substitution effect. On the other hand, with a higher wage, the worker has a higher income, and therefore, the worker can afford to work fewer hours and still maintain the same level of satisfaction. This is the income effect. If the worker decreases the number of hours worked, it implies that the income effect is greater than the substitution effect.

If One Worker Suppliers Fewer Hours of Labor When Wage