Figure 17-4

-Refer to Figure 17-4.Which of the following is true if the wage rate increases from W₀ to W₁?

Question

Figure 17-4
 
-Refer to Figure 17-4.Which of the following is true if the wage rate increases from W₀ to W₁?

Quizplus · Accepted Answer

As the wage rate increases from W₀ to W₁, the relative price of leisure increases, leading to a substitution effect of working more and leisure less. Additionally, as the wage rate increases, the worker's income and purchasing power also increase, leading to an income effect of working more or working less depending on whether leisure is a normal good or inferior good. Since leisure is a normal good, the income effect will be positive and less than the substitution effect. Hence, the substitution effect is larger than the income effect.

Figure 17-4 -Refer to Figure 17-4.Which of the Following Is True If