Exhibit 12-10 In Exhibit 12-10, which of the following is true between points a and b?

Question

Exhibit 12-10  In Exhibit 12-10, which of the following is true between points a and b?

Quizplus · Accepted Answer

Between points a and b, the wage rate increases while the indifference curve is held constant. This causes the individual to substitute away from leisure and towards work, resulting in a positive substitution effect. However, the income effect can either reinforce or offset the substitution effect. In this case, since the individual is now earning a higher wage per hour, their income effect leads them to want to work less (since they can now purchase more goods and leisure with the same amount of work). Whether the income effect reinforces or offsets the substitution effect depends on the relative magnitude of the two effects. Since point b represents a higher quantity of labor supplied than point a, it indicates that the substitution effect dominates the income effect. Therefore, the correct answer is B.

Exhibit 12-10 in Exhibit 12-10, Which of the Following