In labor markets,a change in the wage rate has both an income and a substitution effect.An increase in wages causes an increase in real income but at the same time it increases the relative price of leisure for the worker.If the increase in the wage rate causes an individual to work less:
A)the income effect will dominate the substitution effect.
B)the substitution effect will dominate the income effect.
C)the substitution and the income effects will cancel each other out.
D)then leisure will be referred to as an inferior good.
E)the increase in wage rates will cause an increase in the supply of labor.

Question

Quizplus · Accepted Answer

When an increase in wages causes an individual to work less, it indicates that the income effect (which encourages more leisure as income rises) is stronger than the substitution effect (which encourages more work as the opportunity cost of leisure increases).

In Labor Markets,a Change in the Wage Rate Has Both