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

Question

Quizplus · Accepted Answer

When workers experience a positive price surprise, they incorrectly perceive that their real wage rate has risen, leading them to work fewer hours due to the dominant income effect.

Assume That the Income Effect Dominates the Substitution Effect