Question

Joe, Patrick, and Adam are friends. They have the same preference over consumption and leisure. Joe has two jobs. He auditions for sitcoms during daytime and works at CVS at night time. Patrick works from 9 to 5 as a curator at a local museum. Adam is a partner of a law firm and works over time almost every week. Clearly both Joe and Adam work more than Patrick. This is because:_______ 1. in both cases income effect dominates. 2. for Joe income effect dominates while for Adam substitution effect dominates. 3. for Joe substitution effect dominates while for Adam income effect dominates. 4. in both cases substitution effect dominates

Answer 1

Answer:

2. For Joe income effect dominates while for Adam substitution effect dominates

Explanation:

Income effect refers to change in the real i.e inflation adjusted income when prices change.

In the given case, Joe works at two jobs which means that for a greater income he is willing to work for more hours. Thus, in his case it can be said that income effect is prominent.

In the case of Adam, he works overtime regularly which means for every extra hour of work, he earns an extra income. This represents change in the relative income owing to change in working habits. This is a case of substitution effect.