The income effect of a higher real wage on the quantity of labor supply is the
A)idea that workers feel psychologically wealthier when wages are higher, so they work more.
B)effect that income must rise when wages rise.
C)tendency of workers to supply more labor in response to becoming wealthier.
D)tendency of workers to supply less labor in response to becoming wealthier.

Question

Quizplus · Accepted Answer

The income effect of a higher real wage on the quantity of labor supply is the tendency of workers to supply less labor in response to becoming wealthier. As workers earn more money for each hour worked, they may choose to work fewer hours in order to maintain their desired level of leisure time. This is known as the income effect, which operates in the opposite direction of the substitution effect, which suggests that a higher wage will lead to an increased supply of labor as workers substitute work for leisure.

The Income Effect of a Higher Real Wage on the Quantity