In general, an increase in wages will lead to some reaction in line with
A)the income effect but not the substitution effect.
B)the substitution effect but not the income effect.
C)both the income and substitution effect.
D)neither the income effect nor the substitution effect.

Question

Quizplus · Accepted Answer

An increase in wages will lead to both the income effect and the substitution effect. The income effect refers to the change in consumption patterns that occur as a result of changes in purchasing power. As wages increase, individuals have more money to spend and are therefore able to consume more goods and services. This effect tends to increase demand for all normal goods. The substitution effect, on the other hand, refers to the change in consumption patterns that occur as a result of changes in relative prices. As wages increase, the opportunity cost of leisure increases, and individuals may choose to work more hours to increase their income. This effect tends to increase demand for goods and services whose prices have fallen relative to other goods and services. Therefore, option C is the correct answer.

In General, an Increase in Wages Will Lead to Some