An increase in the real wage
A) unambiguously increases consumption and increases labor supply.
B) increases consumption and has an ambiguous effect on labor supply.
C) has an ambiguous effect on consumption and increases labor supply.
D) has an ambiguous effect on both consumption and labor supply.

Question

Quizplus · Accepted Answer

An increase in real wage means an increase in purchasing power and therefore an increase in consumption. However, the effect on labor supply is ambiguous because higher wages may increase the opportunity cost of leisure and encourage individuals to work more, but at the same time, it may also decrease the need to work longer hours if the individual's income goal is already being met. Therefore, an increase in real wage increases consumption and has an ambiguous effect on labor supply.

An Increase in the Real Wage