An increase in the real wage
A) unambiguously increases consumption and increases labour supply.
B) increases consumption and has an ambiguous effect on labour supply.
C) has an ambiguous effect on consumption and increases labour supply.
D) has an ambiguous effect on both consumption and labour supply.
E) increases consumption and decreases labour supply.

Question

Quizplus · Accepted Answer

When the real wage increases, the purchasing power of workers increases, leading to an increase in consumption. However, the higher wage might also lead to a substitution effect whereby workers choose to work less and consume more leisure. This would result in a decrease in labour supply. Therefore, the effect on labour supply is ambiguous.

An Increase in the Real Wage