If the income effect is smaller than the substitution effect, higher net wages will ?
Correct answer: C. increase the supply of labour
- A. reduce the supply of labour.
- B. increase the demand for labour
- C. increase the supply of labour
- D. have no effect on the supply of labour
Explanation
A higher wage makes leisure more costly in terms of forgone earnings, creating a substitution effect toward work. If this effect exceeds the income effect toward leisure, labour supply increases.
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