Higher wage rates allow a person to reduce the hours worked without losing income.This is known as the
A)Substitution effect.
B)Income effect.
C)Law of diminishing marginal utility.
D)Law of diminishing marginal leisure.

Question

Quizplus · Accepted Answer

The situation described is known as the income effect, which occurs when a change in wage rates affects a person's purchasing power, allowing them to increase or decrease their consumption of goods and services without losing income. The substitution effect, on the other hand, refers to the tendency of individuals to substitute cheaper goods and services for more expensive ones when their relative prices change. The laws of diminishing marginal utility and leisure are unrelated to this particular situation.

Higher Wage Rates Allow a Person to Reduce the Hours