Damon's wage falls. The substitution effect would cause him to _____ his work hours, and the income effect would cause him to _____ his work hours.

Question

Quizplus · Accepted Answer

The substitution effect of a lower wage would cause Damon to decrease his work hours because the opportunity cost of leisure time has now decreased relative to the cost of working. Meanwhile, the income effect would cause him to increase his work hours as he tries to compensate for the loss of income from the lower wage. However, the income effect is usually smaller than the substitution effect, resulting in an overall decrease in work hours.

Damon's Wage Falls