Suppose that Annette gets an increase in her wage and she decides to work fewer hours. For her, the substitution effect of the wage change is
A) greater than the income effect.
B) less than the income effect.
C) exactly offset by the income effect.
D) zero.

Question

Quizplus · Accepted Answer

The substitution effect occurs when Annette increases her wage and decides to work fewer hours because leisure time has become relatively more valuable. This effect is likely to be less than the income effect, which occurs because the increase in her wage has resulted in an increase in her income, allowing her to purchase more goods and services, including leisure time. Therefore, Annette may choose to work fewer hours and consume more leisure time, resulting in the income effect being greater than the substitution effect.

Suppose That Annette Gets an Increase in Her Wage and She