If people choose to work more hours because the Social Security tax reduces their real wage,their behavior is dominated by the
A)Substitution effect
B)Bequest effect
C)Income effect
D)Wealth effect
E)Real wage effect

Question

Quizplus · Accepted Answer

The phenomenon described in the statement is an example of the income effect, which in this case can be seen as a reduction in the real wage due to the Social Security tax. The income effect is the change in an individual's consumption or work effort resulting from a change in their purchasing power (i.e., their income). In this case, the Social Security tax reduces the purchasing power of workers by lowering their real wage (i.e., the wage adjusted for inflation and taxes). As a result, workers may choose to work more hours in order to maintain their standard of living or desired level of consumption. This is called the income effect because the change in the real wage changes the worker's income and therefore their behavior. The other options (A, B, D, and E) do not adequately describe the situation described in the statement.

If People Choose to Work More Hours Because the Social