When consumption and leisure are both normal goods,an increase in real dividend income minus taxation,the rational consumer
A) increases consumption and increases labour supply.
B) increases consumption and reduces labour supply.
C) reduces consumption and increases labour supply.
D) reduces consumption and reduces labour supply.
E) increases consumption and savings

Question

Quizplus · Accepted Answer

An increase in real income without affecting taxation implies that the individual has more disposable income to spend. Since both consumption and leisure are normal goods, an increase in income leads to an increase in both goods. However, the individual might decide to reduce their labour supply, as they now have more income to substitute for leisure. Therefore, the rational consumer will increase consumption and reduce labour supply.

When Consumption and Leisure Are Both Normal Goods,an Increase in Real