Figure 17-4
-Refer to Figure 17-4.Which of the following is true if the wage rate increases from W0 to W1?

Question

Figure 17-4 
-Refer to Figure 17-4.Which of the following is true if the wage rate increases from W0 to W1?

Quizplus · Accepted Answer

An increase in the wage rate from W0 to W1 will increase the opportunity cost of leisure, leading workers to substitute leisure time for work, which is the substitution effect. The income effect of a wage increase is the change in leisure time demand that results from the change in income caused by the wage increase. The income effect is positive, leading workers to increase leisure time. However, the magnitude of the substitution effect is expected to be larger than the income effect as workers are more likely to substitute leisure time for work as the opportunity cost of leisure increases. Therefore, the best choice is B, the substitution effect is larger than the income effect.

Figure 17-4 -Refer to Figure 17-4.Which of the Following Is True If