(Figure: Labor Supply) 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

Quizplus · Accepted Answer

When the wage rate falls from $20 to $10, the budget constraint will shift from AB to CD. At the new wage rate, the consumer will be able to afford less leisure and hence there will be a decrease in leisure consumption. This decrease in leisure will result in an increase in work hours, which is the substitution effect. However, the consumer's income has also decreased due to the lower wage rate, which means they can afford less of both leisure and consumption goods. This leads to a decrease in work hours due to the income effect. Since the income effect dominates the substitution effect, the consumer will work less. Therefore, the correct answer is (D) the substitution effect will dominate and the consumer will work less.

(Figure: Labor Supply) Refer to the Figure