Assume that the substitution effect dominates the income effect. When workers experience a positive price surprise, they
A) correctly perceive that their real wage rate has fallen, which leads them to work fewer hours.
B) incorrectly perceive that their real wage rate has fallen, which leads them to work fewer hours.
C) correctly perceive that their real wage rate has risen, which leads them to work more hours.
D) incorrectly perceive that their real wage rate has risen, which leads them to work more hours.

Question

Quizplus · Accepted Answer

When workers experience a positive price surprise, they may incorrectly perceive that their real wage rate has risen due to nominal wage increases, leading them to work more hours as the substitution effect (working more due to higher perceived wages) dominates the income effect.

Assume That the Substitution Effect Dominates the Income Effect