Your boss has told you that because of a decrease in the demand for the designer baby food your firm produces,he will have to cut everyone's salary next year to avoid layoffs.In response to this news you would
A)increase your labour supply because the income effect would be equal to the substitution effect.
B)decrease your labour supply because the substitution effect would be stronger than the income effect.
C)increase your labour supply because there would be an income effect,but no substitution effect.
D)decrease your labour supply because there would be a substitution effect,but no income effect.

Question

Quizplus · Accepted Answer

When salaries are cut, the income effect suggests you might work more to maintain your income level, as there is no substitution effect in this context.

Your Boss Has Told You That Because of a Decrease