Which of the following statements is true?

Question

Quizplus · Accepted Answer

The income effect and substitution effect of a change in wage rate work in opposite directions. The income effect suggests that an increase in wage rate will increase income and therefore, increase leisure time as people can now afford more leisure. On the other hand, the substitution effect suggests that an increase in wage rate increases the opportunity cost of leisure, therefore, decreasing leisure time and increasing labor supply. The net effect of these two is dependent on the relative magnitudes of the income and substitution effects but they always work in opposite directions. Therefore, option C is correct.

Which of the Following Statements Is True