According to supply-side economists, as tax rates are reduced, labor supply should increase. This implies that
A) the income effect of a wage change is greater than the substitution effect of a wage change.
B) the substitution effect of a wage change is greater than the income effect of a wage change.
C) there is no income effect when tax rates are changed.
D) there is no substitution effect when tax rates are changed.

Question

Quizplus · Accepted Answer

According to supply-side economists, reducing tax rates will increase the incentive for individuals to work more, as they get to keep more of their earnings. This implies a greater substitution effect of a wage change, as individuals will substitute leisure time for work time to take advantage of the potential increase in disposable income.

According to Supply-Side Economists, as Tax Rates Are Reduced, Labor