Question

A higher wage rate will lead to increases in the amount of laborsupplied if the:a. income effect is stronger than the substitution effect.b. substitution effect is stronger than the income effect.c. income and substitution effects cancel each other out.d. income and substitution effects are both negative.e. income and substitution effects are not present.

Answer 1

Answer: The correct answer is "B). substitution effect is stronger than the income effect."

Explanation: A higher wage rate will lead to increases in the amount of laborsupplied if the substitution effect is stronger than the income effect, this happens because this happens because if the substitution effect is stronger than the income effect increases the additional benefit for a worker.

Because if the income effect were greater than the substitution effect the worker would earn more in less time and decrease the amount of labor supplied.