(Figure: Labor Supply) Refer to the figure. The figurerepresents the budget constraint and indifference curves for the
A)the income effect will dominate and the consumer will work more.
B)the substitution effect will dominate and the consumer will work more.
C)the income effect will dominate and the consumer will work less.
D)the substitution effect will dominate and the consumer will work less.

Question

(Figure: Labor Supply) Refer to the figure. The figurerepresents the budget constraint and indifference curves for the 
A)the income effect will dominate and the consumer will work more. 
B)the substitution effect will dominate and the consumer will work more. 
C)the income effect will dominate and the consumer will work less. 
D)the substitution effect will dominate and the consumer will work less.

Quizplus · Accepted Answer

The increase in wage rate will result in a decrease in the marginal utility of leisure and an increase in the marginal utility of consumption. This will induce the consumer to substitute leisure for consumption and work more, which is the substitution effect. However, the increase in wage rate will also increase the consumer's income, making them able to afford more leisure, which is the income effect. Since leisure is a normal good, the increase in income will induce the consumer to consume more leisure and work less. The income effect will dominate the substitution effect, resulting in the consumer working less. Therefore, the best choice is D, the substitution effect will dominate and the consumer will work less.

(Figure: Labor Supply) Refer to the Figure