When consumption and leisure are both normal goods, an increase in real dividend income minus taxation, the rational consumer
A)increases consumption and savings.
B)increases consumption and reduces labour supply.
C)reduces consumption and reduces labour supply.
D)reduces consumption and increases labour supply.
E)increases consumption and increases labour supply.

Question

Quizplus · Accepted Answer

When consumption and leisure are both considered normal goods, an increase in real dividend income minus taxation (effectively an increase in non-labor income) would lead to an increase in consumption because the individual can now afford more goods and services. Additionally, since leisure is also a normal good, the individual would value spending more time in leisure activities, which translates to a reduction in labor supply. This is because with higher non-labor income, the individual can afford to work less while maintaining or even improving their standard of living.

When Consumption and Leisure Are Both Normal Goods, an Increase