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Figure: Rita's Time Allocation Budget Line
-(Figure: Rita's Time Allocation Budget Line)Look at the figure Rita's Time Allocation Budget Line.It is based on 80 hours available for labour and leisure.Rita chooses 40 hours of leisure and an income of $280.When her hourly wage doubles,Rita chooses 50 hours of leisure and an income of $420.The substitution effect is making her work _____,the income effect is making her work _____,and the substitution effect is _____ than the income effect.
A) more;less;stronger
B) less;more;stronger
C) more;less;weaker
D) less;more;weaker

Question

Use the following to answer questions :
Figure: Rita's Time Allocation Budget Line 
-(Figure: Rita's Time Allocation Budget Line)Look at the figure Rita's Time Allocation Budget Line.It is based on 80 hours available for labour and leisure.Rita chooses 40 hours of leisure and an income of $280.When her hourly wage doubles,Rita chooses 50 hours of leisure and an income of $420.The substitution effect is making her work _____,the income effect is making her work _____,and the substitution effect is _____ than the income effect.
A) more;less;stronger 
B) less;more;stronger 
C) more;less;weaker 
D) less;more;weaker

Quizplus · Accepted Answer

The substitution effect is making her work more as her hourly wage has increased, making leisure more expensive compared to work. The income effect is making her work less as her income has increased, making leisure more affordable compared to work. The substitution effect is stronger because the increase in hourly wage has a direct impact on the relative prices of leisure and work, whereas the increase in income has an indirect impact through the change in purchasing power. Therefore, the best choice is C, where the substitution effect is stronger than the income effect, and Rita works more.

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