Jenny's hourly wage rate was increased from $17 to $21. As a result of the wage increase, Jenny desires to work fewer hours and take more hours of leisure. For Jenny
A) the income effect must be zero.
B) the substitution effect dominates the income effect.
C) the income effect dominates the substitution effect.
D) the substitution effect must equal the income effect.

Question

Quizplus · Accepted Answer

The income effect dominates the substitution effect when a wage increase leads to a preference for more leisure (working fewer hours) because the higher income allows for more consumption of leisure without the need to work as many hours to maintain a desired standard of living.

Jenny's Hourly Wage Rate Was Increased from $17 to $21