When a person receives a wage increase,changes in his or her labor supply depend on:
A)a substitution effect and an income effect.
B)a substitution effect only.
C)an income effect only.
D)diminishing marginal product.

Question

Quizplus · Accepted Answer

When a person receives a wage increase, there are two effects that determine the change in labor supply: the substitution effect and the income effect. The substitution effect occurs when the wage increase makes working more attractive compared to leisure time, so the person increases their labor supply. The income effect occurs because the wage increase increases the person's income, making them able to afford more leisure time. This can cause the person to decrease their labor supply. The overall effect on labor supply depends on which effect is stronger.

When a Person Receives a Wage Increase,changes in His or Her