An increase in the real wage
A)has an ambiguous effect on both consumption and labour supply.
B)increases consumption and decreases labour supply.
C)unambiguously increases consumption and increases labour supply.
D)increases consumption and has an ambiguous effect on labour supply.
E)has an ambiguous effect on consumption and increases labour supply.

Question

Quizplus · Accepted Answer

An increase in the real wage increases purchasing power, which leads to an increase in consumption. The effect on labour supply is ambiguous because some workers may choose to work more due to the higher wage, but others may reduce their work hours or drop out of the labor force altogether, either because they can afford to or because the opportunity cost of leisure has increased. Therefore, option D is the best choice as it recognizes the ambiguous effect on labour supply while acknowledging the unambiguous increase in consumption.

An Increase in the Real Wage