Homework: HN7 Score: 0 of 1 pt X Concept: Sub/inc Effect on Labor Supply A worke

Question

Homework: HN7 Score: 0 of 1 pt X Concept: Sub/inc Effect on Labor Supply A worker's wage rises from $10.00 per hour to $12.50 per hour. Will the indvidual work more hours? The worker will work O A. fewer hours due to the substitution effect and the income eect O B. fewer hours if the substitution effect is smaler than the income effect. C. fewer hours if the substitution effect is larger than the income effect. O D. more hours due to the substitution effect and the income effect O E. fewer hours due to the substitution effect Click to select your answer and then click Check Answer Clear All All parts showing

Explanation / Answer

The right answer is option B. fewer hours if the substitution effect is smaller than the income effect

Explanation: When wage increases, a laborer faces two effects - substitution effect and income effect. When wage increases, the opportunity cost of leisure increases and the laborer wants to work more and take less leisure. This is a substitution effect. However, with an increase in wage, the laborer reaches a particular income level by working fewer hours. So, the laborer might demand more leisure and work fewer hours. This is income effect. With increasing wage, a laborer supplies more labor hours when substitution effect is larger than income effect. On the other hand, with increasing wage, a laborer supplies fewer labor hours when substitution effect is smaller than income effect

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