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 from W₀ to W₁, the opportunity cost of leisure increases, creating a substitution effect where workers tend to work more since leisure has become more expensive. However, the increase in wage rate also leads to an increase in their purchasing power, which makes them consume more leisure, creating an income effect where they tend to work less. In this case, the substitution effect dominates the income effect, leading to an increase in the quantity of labor supplied. Therefore, the correct option is (B) the substitution effect is larger than the income effect.

Figure 10-4 -Refer to Figure 10-4.Which of the Following Is True If