According to supply-side economists, as tax rates are increased, labor supply should decrease. This implies that the substitution effect of a wage change ________ the income effect of a wage change.
A) is less than
B) is greater than
C) is equal to
D) has no impact on

Question

Quizplus · Accepted Answer

The substitution effect of a wage change being greater than the income effect implies that as wages (or returns to labor) decrease due to higher taxes, the incentive to work diminishes more because of the substitution effect (choosing leisure over work) than the income effect (working more to maintain income) would counteract.

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