At existing wage rates, hospitals face a shortage of registered nurses (RNs).Some studies have suggested that an increase in RN wages will actually reduce the hours supplied by existing RNs, making it more difficult for hospitals to find RNs.Which of the following is likely the cause of these findings?
A)Constant marginal productivity
B)The cost disease
C)A substitution effect larger than the income effect
D)An income effect larger than the substitution effect

Question

Quizplus · Accepted Answer

An income effect larger than the substitution effect is likely the cause of these findings. When wages increase, the income effect can lead to individuals working fewer hours because they can maintain their desired standard of living with less work. This contrasts with the substitution effect, where higher wages would typically encourage more work hours by making leisure relatively more expensive. In this case, the income effect dominates, leading RNs to supply fewer hours despite higher wages.

At Existing Wage Rates, Hospitals Face a Shortage of Registered