Suppose that an individual has chosen not to work.Then a change in the wage rate:
A) creates a substitution effect, but no income effect.
B) creates an income effect, but no substitution effect.
C) creates both and income and substitution effect.
D) creates neither an income effect nor a substitution effect.

Question

Quizplus · Accepted Answer

A change in the wage rate creates a substitution effect because the opportunity cost of not working changes, making work relatively more attractive compared to leisure. However, since the individual is not working, there is no change in actual income, so there is no income effect.

Suppose That an Individual Has Chosen Not to Work