The more permanent an employee perceives an increase in her real wages to be
A)the larger the income effect is and the more likely it is that the quantity of labour supplied will be increased.
B)the larger the income effect is and the more likely it is that the quantity of labour supplied will be reduced.
C)the larger the substitution effect is and the more likely it is that the quantity of labour supplied will be increased.
D)the larger the substitution effect is and the more likely it is that the quantity of labour supplied will be reduced.

Question

Quizplus · Accepted Answer

When an employee perceives a wage increase as permanent, the income effect dominates, leading to a potential reduction in labor supply as the employee can maintain the same standard of living while working fewer hours.

The More Permanent an Employee Perceives an Increase in Her