When wages increase, the income effect ________ the supply of labor and the substitution effect ________ the supply of labor.

Question

Quizplus · Accepted Answer

When wages increase, the income effect leads to an increase in the purchasing power of workers, and some may choose to work less and enjoy more leisure time. This leads to a decrease in the supply of labor due to the income effect. At the same time, the substitution effect leads to a decrease in the opportunity cost of leisure and an increase in the opportunity cost of working, which means workers substitute leisure for work, resulting in a higher supply of labor. Therefore, the correct answer is A) decreases; increases.

When Wages Increase, the Income Effect ________ the Supply of Labor