Leila receives a substantial raise in pay and decides to work fewer hours each week. This is an example of the _____ effect on the labor supply.

Question

Quizplus · Accepted Answer

The income effect occurs when an increase in income leads to a change in the quantity of goods or services consumed, or in this case, a change in the amount of labor supplied. When Leila decides to work fewer hours as a result of her pay raise, it demonstrates the income effect, as she can afford to maintain or improve her standard of living while working less.

Leila Receives a Substantial Raise in Pay and Decides to Work