Ryan experiences an increase in her wages. The hours of labor that she supplies to the market would increase if
A)the income effect is larger than the substitution effect.
B)the substitution effect is larger than the income effect.
C)neither the income effect nor the substitution effect apply to Ryan's labor-leisure tradeoff.
D)Ryan views both labor and leisure as inferior goods.

Question

Quizplus · Accepted Answer

The substitution effect refers to the change in consumption patterns due to a change in the relative prices of goods or services, holding the consumer's utility constant. When wages increase, the price of leisure (in terms of forgone earnings) increases, making work relatively more attractive. If the substitution effect (the incentive to work more because the relative price of leisure has increased) is larger than the income effect (the incentive to work less because one can afford to maintain the same standard of living with fewer hours worked), Ryan will supply more hours of labor to the market.

Ryan Experiences an Increase in Her Wages