Author Question: Comment on the following statement: An increase in the wage always leads to an increase in the ... (Read 47 times)

jwb375 · **on:** Jun 29, 2018

Comment on the following statement: An increase in the wage always leads to an increase in the quantity of labor supplied.

What will be an ideal response?

Question 2

Tyler's wage rises and he chooses to increase the number of hours he supplies to the labor market. What does this imply about the relative sizes of the substitution effect and the income effect? Explain.

What will be an ideal response?

cascooper22 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The statement is false. If the substitution effect is larger than the income effect, a wage increase will lead to an increase in the quantity of labor supplied. However, if the income effect is larger, an increase in the wage will actually lead to a decline in the quantity of labor supplied.

Answer to Question 2

This must mean that the substitution effect outweighs the income effect. The substitution effect of a wage increase implies that leisure is more expensive and the individual will work more. The income effect suggests that since the worker is better off (and leisure is a normal good), the worker will work less. Since Tyler chooses to work more, the substitution effect must be larger.