Suppose that Annette gets an increase in her wage and she decides to work fewer hours.For her,the substitution effect of the wage change is
A)only partially offset by the income effect.
B)more than offset by the income effect.
C)exactly offset by the income effect.
D)indeterminate since we do not know if consumption and leisure are normal goods for Annette.

Question

Quizplus · Accepted Answer

When Annette gets an increase in her wage, she experiences an income effect and a substitution effect. The income effect suggests that she may choose to work less and enjoy more leisure time because her income has increased. The substitution effect suggests that she may choose to work more because the opportunity cost of leisure (foregone income) has increased. However, if Annette is a normal good (i.e., she likes to consume more leisure when her income rises), then the income effect will be stronger than the substitution effect, which means she will work fewer hours. Therefore, in this scenario, choice B is the best answer because the income effect more than offsets the substitution effect.

Suppose That Annette Gets an Increase in Her Wage and She