Penny's wage rate decreases because of the imposition of a payroll tax, Penny decides to work fewer hours. This is an example of the:

Question

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The decrease in wage rate due to the payroll tax affects Penny's incentives to work. The substitution effect of a wage decrease suggests that as the wage rate decreases, working offers less income for the same amount of time and effort, making leisure time more attractive in comparison. Therefore, Penny decides to work fewer hours. The other options are not relevant here: 
A) induced savings effect refers to the increase in savings when an individual's income rises.
B) income effect of a wage decrease suggests that as the wage rate decreases, the income earned falls, which reduces the ability to purchase goods and services, and hence individuals may work more to compensate for the lost income.
D) reverse-endowment effect of a wage decrease is not an economic concept.

Penny's Wage Rate Decreases Because of the Imposition of a Payroll