Consider the situation depicted in Figure 4.2,where the worker experiences a decrease in her wage.Her initial budget constraint is B0D,and following the decrease her new budget constraint is B1D.The move from to is the substitution effect,and the move from to is the income effect.

Question

Quizplus · Accepted Answer

The worker experiences a decrease in her wage, leading to a parallel shift of the budget constraint from B0D to B1D. The move from point Q to point R on the new budget constraint is the substitution effect, where the worker substitutes away from leisure and towards work due to the decreased wage rate. The move from point R to point P along the original indifference curve is the income effect, where the worker reduces her labor supply due to the decrease in her income. Finally, the move from point P to point Q on the new budget constraint is due to the combined effect of both substitution and income effects, leading to a net decrease in labor supply. Therefore, the correct answer is choice C (Q,R,P,Q).

Consider the Situation Depicted in Figure 4