Assuming leisure is a normal good, if the income effect is greater than the substitution effect a wage increase ?
Correct answer: B. will decreases labour supply
- A. will have no effect on labour supply
- B. will decreases labour supply
- C. could cause either an increases or a decrease in labour supply
- D. will increase labour supply.
Explanation
A higher wage makes leisure more expensive, creating a substitution effect toward work, but it also raises real income and demand for normal leisure. If the income effect is stronger, the person chooses more leisure and supplies less labour.
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