Barry's wage increased and he responded by working more hours. Which statement must be TRUE?
A) Leisure is an inferior good.
B) The substitution effect of the wage increase dominated the income effect.
C) The income effect of the wage increase dominated the substitution effect.
D) The substitution and income effect both increased hours of work.

Question

Quizplus · Accepted Answer

The substitution effect suggests that as wages increase, the opportunity cost of leisure increases, leading individuals to work more hours. Since Barry worked more hours, the substitution effect must have dominated the income effect, which would typically lead to working fewer hours as income rises.

Barry's Wage Increased and He Responded by Working More Hours