Figure: Labor Supply Refer to the figure. The figure above represents the budget constraint and indifference curves for the labor-leisure decision of a consumer when the wage rate falls from $20 to $10. Based on the figure,:

Question

Figure: Labor Supply  Refer to the figure. The figure above represents the budget constraint and indifference curves for the labor-leisure decision of a consumer when the wage rate falls from $20 to $10. Based on the figure,:

Quizplus · Accepted Answer

When the wage rate falls, the budget constraint shifts inward, leading to a decrease in real income. The consumer faces both substitution and income effects. The substitution effect leads the consumer to work more because leisure has become relatively more expensive compared to work, while the income effect causes the consumer to work less because they can now afford to enjoy more leisure. The two effects work in opposite directions. In this case, the income effect is stronger than the substitution effect, causing the consumer to work less. Therefore, the correct answer is D.

Figure: Labor Supply Refer to the Figure