If the substitution effect dominates the income effect, then an increase in the wage rate will increase the quantity of labor supplied by an individual.

Question

Quizplus · Accepted Answer

The substitution effect refers to the idea that as the wage rate increases, individuals will substitute leisure time for work time, resulting in an increase in labor supply. The income effect refers to the idea that as the wage rate increases, individuals may actually choose to work less because they can afford to maintain their desired standard of living with fewer work hours. If the substitution effect dominates the income effect, then individuals will respond to an increase in their wage rate by supplying more labor.

If the Substitution Effect Dominates the Income Effect, Then an Increase