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

Question

Quizplus · Accepted Answer

If the substitution effect dominates the income effect, a decrease in transfer payments would lead to an increase in labor supply as individuals work more to compensate for the lost income, while the effect on consumption could vary depending on the relative strengths of the substitution and income effects.

If the Substitution Effect Dominates the Income Effect, a Decrease