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

Question

Quizplus · Accepted Answer

An increase in the real wage would result in both an income effect (as the consumer's purchasing power has increased) and a substitution effect (making leisure less attractive relative to work). Therefore, the answer is a combination of income and substitution effects. This would result in a change in the consumer's budget line, indicating that the consumer can now afford more goods and services. The increase in real wage may also lead to changes in labour supply, as workers may be willing to work more (the substitution effect) or less (the income effect).

An Increase in the Real Wage