Suppose that Stacy's hourly wage increases,and she decides to work fewer hours.For her,the substitution effect of the wage change is
A) only partially offset by the income effect.
B) more than offset by the income effect.
C) exactly offset by the income effect.
D) We do not have enough information with which to answer the question..

Question

Quizplus · Accepted Answer

The substitution effect suggests that as the wage increases, individuals will substitute towards more leisure time as the opportunity cost of leisure becomes lower. Therefore, if Stacy's hourly wage increases, it will encourage her to work fewer hours (substitution effect). However, the income effect suggests that as the wage increases, her income will increase, which will encourage her to work more hours (income effect). If Stacy decides to work fewer hours despite the increase in her hourly wage, it suggests that the income effect is more than offset by the substitution effect, leading to the overall choice of working fewer hours.

Suppose That Stacy's Hourly Wage Increases,and She Decides to Work