Figure 10.4 -Refer to Figure 10.4.Which of the following is true if the wage rate increases from W₀ to W₁? A) The income effect is larger than the substitution effect. B) The substitution effect is larger than the income effect. C) The income effect and the substitution effect are equal. D) The supply curve is unit-elastic.

Question

Quizplus · Accepted Answer

As the wage rate increases, the opportunity cost of leisure increases, which leads to a decrease in the quantity of labor supplied. This is the substitution effect. However, with the increased wage rate, the individual also has higher income, which could lead to an increase in the quantity of labor supplied. This is the income effect. In this case, since the wage rate only increases slightly from W₀ to W₁, the substitution effect is likely to be larger than the income effect, leading to a decrease in the quantity of labor supplied. Therefore, the correct answer is B. The supply curve's elasticity cannot be determined based on the information given, so D is not the correct answer.

Figure 10.4 -Refer to Figure 10.4.Which of the Following Is True If