When a person receives a wage increase,changes in his or her labour supply depend on:
A) a substitution effect and an income effect.
B) a substitution effect only.
C) an income effect only.
D) diminishing marginal product.

Question

Quizplus · Accepted Answer

When a person receives a wage increase, the substitution effect refers to the tendency for them to increase their labour supply in response to the relative increase in the wage rate, while the income effect refers to the tendency for them to reduce their labour supply as a result of the increased purchasing power of their wage. Therefore, changes in labour supply depend on both the substitution and income effects. The other choices are not directly related to the relationship between wage increases and labour supply.

When a Person Receives a Wage Increase,changes in His or Her