The substitution effect shows a _____ relationship between wages and hours worked, whereas the income effect shows a _____ relationship.

Question

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The substitution effect indicates that as wages increase, individuals are incentivized to work more hours, substituting labor for leisure due to the higher opportunity cost of not working, showing a positive relationship. The income effect, however, suggests that as individuals earn more, they can afford more leisure and may choose to work fewer hours, indicating a negative relationship between wages and hours worked.

The Substitution Effect Shows a _____ Relationship Between Wages and Hours