Kip will work fewer hours if his salary increases.For Kip,the ________ effect must outweigh the ________ effect.
A)substitution;income
B)income;substitution
C)income;utility
D)utility;substitution

Question

Quizplus · Accepted Answer

The income effect occurs when an increase in salary leads to a person working less because they can maintain the same standard of living with fewer hours. The substitution effect is when a person works more because the relative reward of working (compared to leisure) has increased. If Kip works fewer hours with a salary increase, it means the income effect (feeling wealthier and needing to work less) outweighs the substitution effect (the incentive to work more due to higher pay per hour).

Kip Will Work Fewer Hours If His Salary Increases