If Molly Bee increases her work hours when her wage increases, then
A)the income effect of the wage increase outweighs the substitution effect.
B)the substitution effect of the wage increase outweighs the income effect.
C)leisure is an inferior good to Molly.
D)Molly is spending beyond her means.

Question

Quizplus · Accepted Answer

According to the substitution effect, Molly will choose to work more hours because the opportunity cost of leisure has increased due to the higher wage. It is the rational choice to substitute leisure time for work since the reward for an hour of work has increased. Therefore, the substitution effect of the wage increase outweighs the income effect.

If Molly Bee Increases Her Work Hours When Her Wage