If the substitution effect dominates the income effect, an increase in transfer payments will have a positive effect on both consumption and labor supply.

Question

Quizplus · Accepted Answer

When the substitution effect dominates the income effect, an increase in transfer payments typically leads to an increase in consumption due to higher income, but it may decrease labor supply because individuals can maintain the same level of consumption while working less, thanks to the additional income from transfer payments.

If the Substitution Effect Dominates the Income Effect, an Increase