According to the Lucas supply function, workers who experience a positive price surprise will work more hours when
A) there is no substitution effect from a positive price surprise.
B) there is no income effect from a positive price surprise.
C) the substitution effect dominates the income effect.
D) the income effect dominates the substitution effect.

Question

Quizplus · Accepted Answer

The Lucas supply function incorporates both a substitution effect and an income effect. However, when there is a positive price surprise (an increase in wages), the substitution effect dominates the income effect. This is because the higher wage rate incentivizes workers to substitute leisure time for work, as the opportunity cost of leisure (in terms of foregone wages) has increased. Therefore, workers will choose to work more hours in response to a positive price surprise.

According to the Lucas Supply Function, Workers Who Experience a Positive