An increase in the real wage
A) unambiguously increases consumption and increases labour supply.
B) increases consumption and has an ambiguous effect on labour supply.
C) has an ambiguous effect on consumption and increases labour supply.
D) has an ambiguous effect on both consumption and labour supply.
E) increases consumption and decreases labour supply.

Question

Quizplus · Accepted Answer

An increase in the real wage increases the purchasing power of individuals and thus increases consumption. However, the effect on labour supply is ambiguous. On the one hand, individuals may be more willing to work as the opportunity cost of leisure time has increased. On the other hand, individuals may work less because they have achieved their desired level of income and therefore feel less pressure to work additional hours. Therefore, an increase in the real wage has an ambiguous effect on labour supply.

An Increase in the Real Wage