Assume that the government provides a cash transfer to each family regardless of their market earnings.Given this transfer, which of the following hypotheses about labor supply is correct?

Question

Quizplus · Accepted Answer

The cash transfer provides an additional source of income for families, leading to an increase in their purchasing power. This increase in income has both an income effect and a substitution effect on labor supply. The income effect of the additional cash transfer reduces the incentive to work, as individuals can maintain their desired level of consumption with less labor. The substitution effect, on the other hand, increases the incentive to work, as the additional transfer increases the opportunity cost of leisure. However, when the income effect is strong enough, it could offset the substitution effect, leading to a reduction in labor supply. Therefore, the correct hypothesis is that the income effect will reduce labor supply, and there is no substitution effect.

Assume That the Government Provides a Cash Transfer to Each