The overall effect of a higher real wage is:
A)to increase labour as the income and substitution effect reinforce each other.
B)ambiguous on labour as the income and substitution effect work against each other.
C)to decrease labour as the income and substitution effect reinforce each other.
D)ambiguous because the income and substitution effect reinforce each other.

Question

Quizplus · Accepted Answer

The overall effect of a higher real wage on labor supply is ambiguous because the income effect (where individuals may choose to work less because they can maintain the same standard of living with less work) and the substitution effect (where individuals may choose to work more because the relative price of leisure has increased) work against each other.

The Overall Effect of a Higher Real Wage Is