Figure 16-4

-Refer to Figure 16-4. Which of the following is true if the wage rate increases from W0 to W1?

Question

Figure 16-4

-Refer to Figure 16-4. Which of the following is true if the wage rate increases from W0 to W1?

Quizplus · Accepted Answer

When the wage rate increases from W0 to W1, the substitution effect, which represents the change in labor supply due to the change in the relative price of leisure and labor, is larger than the income effect. The income effect reflects the change in labor supply due to the change in overall income. The substitution effect typically encourages more work because labor becomes relatively more rewarding compared to leisure, while the income effect might reduce work since individuals can afford more leisure with their higher income. The dominance of the substitution effect in this scenario leads to an overall increase in labor supply.

Figure 16-4 -Refer to Figure 16-4. Which of the Following Is True