Suppose wages in the market for plumbers increase. Some plumbers start taking on

Question

Suppose wages in the market for plumbers increase. Some plumbers start taking on extra plumbing jobs while others cut back on the number of hours they work. What could explain this?

A. For those plumbers who choose to work more, the substitution effect (on leisure) of the wage increase is weaker than the income effect. For those who decided to work less, the reverse is true.

B. For those plumbers who choose to work more, the substitution effect (on leisure) of the wage increase is stronger than the income effect. For those who decided to work less, the reverse is true.

C. For those plumbers who choose to work less, the substitution effect (on leisure) of the wage increase is exactly offset by the income effect.

D. For those workers who choose to work less, there is no substitution effect to offset the income effect.

Explanation / Answer

Option A

As the wages for plumbers increase, it leads to 2 effects:

1. Income effect - Which would influence the workers to work more.

2. Substitution effect - Influence of liesure over work

For the workers who choose to work more, the substitution effect is lower than the income effect.

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