An increase in the real wage
A)represents a pure income effect.
B)represents a combination of income and substitution effects.
C)leads to no change in labour supply.
D)causes a parallel shift in the consumer's budget line.
E)represents a pure substitution effect.

Question

Quizplus · Accepted Answer

An increase in the real wage represents a combination of income and substitution effects. The income effect raises the opportunity cost of leisure because the consumer has a higher income and can afford to work fewer hours while still maintaining their desired level of consumption. The substitution effect increases the relative attractiveness of working because the wage has increased, making leisure more expensive. Together, these effects lead to a higher quantity of labour supplied.

An Increase in the Real Wage