Which of the following statements are TRUE?
I. The substitution effect of a wage decrease means that people will work more hours.
II. The income effect of a wage decrease means that people will take more leisure.
III. If wages fall and people work fewer hours, the substitution effect dominates the income effect.
IV. If wages increase and people work fewer hours, the income effect dominates the substitution effect.

Question

Quizplus · Accepted Answer

The substitution effect of a wage decrease typically means people will work fewer hours, not more, as leisure becomes relatively cheaper. The income effect of a wage decrease means people might work more to maintain their income. If wages fall and people work fewer hours, the income effect dominates. If wages increase and people work fewer hours, the income effect dominates the substitution effect.

Which of the Following Statements Are TRUE