According to supply-side economists, as tax rates are reduced, labor supply should increase. This implies that ?
Correct answer: D. the substitution effect of a wage change is greater than the income effect of a wage change
- A. there is no income effect when tax rates are changed
- B. the income effect of a wage change is greater than the substitution effect of a wage change.
- C. there is no substitution effect when tax rates are changed
- D. the substitution effect of a wage change is greater than the income effect of a wage change
Explanation
A lower tax rate raises the after-tax reward from working, creating a substitution effect toward labor. If labor supply increases, this substitution effect must outweigh the income effect, which may otherwise encourage more leisure.
Report an error
The more specific you are, the faster it gets fixed. A source beats an opinion.
Prefer email? [email protected]
About Microeconomics
Individual consumers, firms and markets are examined through demand and supply, elasticity, consumer choice, production, costs, revenue and the determination of prices and output. The topic also covers market structures such as perfect competition, monopoly and oligopoly, plus market failure, externalities and the distinction between microeconomic decisions and economy-wide outcomes.
Practise Microeconomics
1,742 free Microeconomics MCQs from Economics, each with the correct answer and an explanation. Unlimited attempts, no account needed.
Discussion
Stuck on an option, or know a faster way to get there? Ask or explain it here.
No comments yet. Be the first to explain this one.
Exams that ask Economics questions like this
Economics is on 3 papers prepared for on TestUstad, and all of them draw the same bank, so this question is worth knowing for every one of them.
More Microeconomics questions
The law of demand implies that ?
What effect is working when the price of a good falls and consumers tend to buy it instead of other goods ?
Demand curves are derived while holding constant ?
If a market generates a side effect or externlity then free market solutions ?
If a producer has market power (can influence the price of the product in the market) then free market solutions ?
If buyers are rational and there is no market failure ?