If a person supplies more hours of labor in response to a wage increase,then
A) the substitution effect is greater than the income effect.
B) the income effect is greater than the substitution effect.
C) the income effect equals the substitution effect.
D) the person is not maximizing utility.

Question

Quizplus · Accepted Answer

According to the law of supply, as the wage increases, the opportunity cost of leisure increases and the person is induced to supply more labor, this is the substitution effect. However, the wage increase also increases the person's purchasing power, which means that their income has increased, and they might choose to work fewer hours and consume more leisure, this is the income effect. If the person supplies more labor in response to the wage increase, then the substitution effect dominates the income effect. Therefore, choice A, the substitution effect is greater than the income effect, is the correct answer.

If a Person Supplies More Hours of Labor in Response