Which of the following is true for most wage earners?
A)The income effect of a wage rate increase is likely to be larger than the substitution effect.
B)The substitution effect of a wage rate increase is likely to equal the income effect.
C)The opportunity cost of leisure is high.
D)The substitution effect of a wage rate increase is likely to be larger than the income effect.

Question

Quizplus · Accepted Answer

For most wage earners, the substitution effect of a wage rate increase is likely to be larger than the income effect. This is because as the wage rate increases, the opportunity cost of leisure increases as well. Therefore, people tend to substitute their leisure time for work, thus increasing their labor supply. The income effect, on the other hand, tends to increase leisure time because with higher wages, people can afford to work fewer hours and enjoy more leisure time. However, the magnitude of the substitution effect is typically greater than the income effect for most wage earners.

Which of the Following Is True for Most Wage Earners