Exhibit 12-4
-In Exhibit 12-4, when the wage rate increases from $9 to $12, the substitution effect outweighs the income effect.

Question

Exhibit 12-4 
-In Exhibit 12-4, when the wage rate increases from $9 to $12, the substitution effect outweighs the income effect.

Quizplus · Accepted Answer

When the wage rate increases, the opportunity cost of leisure increases as well, leading individuals to substitute leisure time for work time, thereby increasing labor supply. This is the substitution effect. On the other hand, the income effect occurs when the increase in wage rate leads to an increase in income, which may lead individuals to consume more leisure time, decreasing labor supply. In this case, the increase in wage rate is large enough to outweigh the income effect, causing a net increase in labor supply.

Exhibit 12-4 -In Exhibit 12-4, When the Wage Rate Increases from $9