Because individuals initially own more time than they consume and sell the difference to their employers,
A) The direction of the income effect is the opposite than it is for other goods
B) The direction of the income effect is the same as it is for other goods
C) There is no income effect resulting from a change in the individual's wage rate
D) The income effect of a wage change is relatively small

Question

Quizplus · Accepted Answer

The income effect for normal goods is that as income increases, the quantity demanded of the good increases as well. However, with labor as a good, the income effect works in the opposite direction. As the wage rate increases, an individual's income also increases, causing them to have more money to spend on leisure time. This leads to a decrease in the quantity of labor supplied, as individuals choose to work fewer hours and enjoy more leisure time.

Because Individuals Initially Own More Time Than They Consume and Sell