Question 1
Caroline's hourly wage rate was reduced from $22 to $16. As a result of the wage decrease, Caroline desires to work more hours and take fewer hours of leisure. For Caroline
◦ the income effect must be zero.
◦ the substitution effect dominates the income effect.
◦ the income effect dominates the substitution effect.
◦ the substitution effect must equal the income effect.
Question 2
Empirical evidence with respect to the labor supply decision suggests that
◦ the income effect seems to dominate for most people, which means that the aggregate labor supply responds negatively to an increase in the wage rate.
◦ the substitution effect seems to dominate for most people, which means that the aggregate labor supply responds positively to an increase in the wage rate.
◦ the substitution effect seems to dominate for most people, which means that the aggregate labor supply responds negatively to an increase in the wage rate.
◦ the income effect seems to dominate for most people, which means that the aggregate labor supply responds positively to an increase in the wage rate.
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