The table below shows the total utility associated with various units of goods X and Y.Table 7.5

-In labor markets, a change in the wage rate has both an income and a substitution effect. An increase in wages causes an increase in real income but at the same time it increases the relative price of leisure for the worker. If an increase in wage rate causes an individual to work less, _____.
A)the income effect dominates the substitution effect
B)the substitution effect dominates the income effect
C)the substitution and income effects cancel each other out
D)then leisure will be referred to as an inferior good
E)the increase in wage rates will cause an increase in the supply of labor

Question

The table below shows the total utility associated with various units of goods X and Y.Table 7.5
 
-In labor markets, a change in the wage rate has both an income and a substitution effect. An increase in wages causes an increase in real income but at the same time it increases the relative price of leisure for the worker. If an increase in wage rate causes an individual to work less, _____.
A)the income effect dominates the substitution effect 
B)the substitution effect dominates the income effect 
C)the substitution and income effects cancel each other out 
D)then leisure will be referred to as an inferior good 
E)the increase in wage rates will cause an increase in the supply of labor

Quizplus · Accepted Answer

When an increase in wage rate causes an individual to work less, it means that the income effect (which leads to an individual affording more leisure due to higher income) dominates the substitution effect (which would normally encourage more work because the opportunity cost of leisure has increased).

The Table Below Shows the Total Utility Associated with Various