If I used to work 40 hours a week at $7 an hour and now I work 35 hours a week at $8 an hour, the substitution effect outweighs the income effect for me.

Question

Quizplus · Accepted Answer

The income effect refers to the change in consumption due to a change in income, while the substitution effect refers to the change in consumption due to a change in relative prices. In this case, the increase in wage rate from $7 an hour to $8 an hour results in an increase in income, which could lead to an increase in consumption (income effect). However, the decrease in work hours from 40 to 35 will result in a decrease in income, which could lead to a decrease in consumption (income effect). Therefore, it is unclear if the substitution effect outweighs the income effect without additional information about the individual's preferences and consumption patterns.

If I Used to Work 40 Hours a Week at $7