Which of the following is true of a change in nonlabor income?
A) There is no substitution effect because a change in nonlabor income does not change the trade-off between work and leisure.
B) There is no income effect because a change in nonlabor income does not change the trade-off between work and leisure.
C) There is no substitution effect because a change in nonlabor income does not change a household's permanent income.
D) There is no income effect because a change in nonlabor income does not change a household's permanent income.

Question

Quizplus · Accepted Answer

A change in nonlabor income affects the income effect but not the substitution effect, because it alters the amount of income available without changing the relative prices of leisure and consumption (i.e., the trade-off between work and leisure).

Which of the Following Is True of a Change in Nonlabor