An increase in the real wage
A) represents a pure substitution effect.
B) represents a pure income effect.
C) represents a combination of income and substitution effects.
D) causes a parallel shift in the consumer's budget line.
E) leads to no change in labour supply.

Question

Quizplus · Accepted Answer

An increase in the real wage has both income and substitution effects on labour supply. The income effect occurs because the worker can now afford to consume more leisure at the same level of income, causing them to work less. The substitution effect occurs because as the wage rate increases, leisure becomes more expensive compared to work, resulting in the worker choosing to work more. Therefore, the overall effect on labour supply is a combination of the income and substitution effects.

An Increase in the Real Wage