Figure: Labor Supply 2 Refer to the figure. The figure represents the budget constraint and indifference curves for the labor-leisure decision of a consumer when the wage rate falls from $20 to $10. For this worker:

Question

Figure: Labor Supply 2  Refer to the figure. The figure represents the budget constraint and indifference curves for the labor-leisure decision of a consumer when the wage rate falls from $20 to $10. For this worker:

Quizplus · Accepted Answer

When the wage rate falls, the substitution effect will induce the worker to work more, as leisure becomes relatively more expensive, while the income effect will induce the worker to work less, as the worker can now afford to consume more leisure at the lower wage rate. The net effect will depend on the relative strength of the two effects. In this case, since the budget constraint has become less steep (i.e. flatter), the income effect will dominate and the consumer will work less. Therefore, the answer is D.

Figure: Labor Supply 2 Refer to the Figure