Suppose you could choose how many hours a week you will work and you are currently earning $50 an hour and working 40 hours a week.If you got a pay increase to $60 an hour and decided to work 45 hours,then we may conclude that your

Question

Quizplus · Accepted Answer

The substitution effect refers to the change in the quantity of labor supplied as a result of a change in the wage rate, while the income effect refers to the change in quantity of labor supplied as a result of a change in income. In this case, the increase in wage rate from $50 to $60 per hour would lead to a substitution effect where the individual would want to work more hours as the opportunity cost of leisure (the foregone wage) has increased. However, the income effect may lead the individual to work less as they are now earning more per hour and may not need to work as many hours to achieve their desired level of income. As the individual has chosen to work more hours, we can infer that the substitution effect outweighed the income effect. Therefore, the answer is B.

Suppose You Could Choose How Many Hours a Week You