Assume that the substitution effect dominates the income effect. When wages fall
A) people will work more hours.
B) people will work fewer hours.
C) people will work the same number of hours.
D) the effect on the hours people work is ambiguous.

Question

Quizplus · Accepted Answer

When wages fall, the substitution effect would suggest that individuals will choose to work fewer hours because their leisure time has become relatively more valuable than their work time. The income effect would suggest that individuals may want to work more hours to make up for the decrease in their income, but if the substitution effect is stronger, the overall effect would be a decrease in the number of hours worked. Therefore, people will work fewer hours.

Assume That the Substitution Effect Dominates the Income Effect