If leisure is a normal good, an increase in the wage ?
Correct answer: B. will increase the amount of labor supplied if the substitution effect outweighs the income effect
- A. will always increase the quantity of labor supplied
- B. will increase the amount of labor supplied if the substitution effect outweighs the income effect
- C. will increase the amount of labor supplied if the income effect outweighs the substitution effect
- D. will always decrease the amount of labor supplied
Explanation
A higher wage makes work more attractive relative to leisure, creating a substitution effect that raises labour supplied, but the higher income can increase desired leisure. Labour supply rises when the substitution effect is stronger than the income effect.
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