Meryl works 10 hours a day in an hourly job that pays $15 per hour.Suppose Meryl's wage rate increases to a really high rate of $10,000 per hour.Your friend argues that Meryl will supply more than 10 hours of work,because her wage rate is much higher.You argue than Meryl will supply less than 10 hours of work,because she can now afford the time off.Your friend is referring to the ________,and you are referring to the ________ of Meryl's wage increase.

Question

Quizplus · Accepted Answer

Your friend is referring to the substitution effect, which suggests that Meryl will substitute her leisure time with work time because her wage rate has increased. This is a behavioral change due to a change in the relative prices of leisure and work. On the other hand, you are referring to the income effect, which suggests that Meryl will reduce her work time because she is now earning much more than before and can afford to reduce her working hours without compromising her income. This is a behavioral change due to a change in income level. Therefore, the best choice is A, which correctly identifies the substitution and income effects of Meryl's wage increase.

Meryl Works 10 Hours a Day in an Hourly Job