Asked by Daisy Salas on May 14, 2024
Verified
For Molly, the substitution effect of a wage increase is stronger than the income effect. In response to a wage increase, will Sally work more hours or will she work fewer hours?
Substitution Effect
The economic principle that as prices rise or income decreases, consumers will replace more expensive items with less costly alternatives.
Income Effect
The impact of a change in an individual's income on their purchasing behavior, specifically how it affects the quantity of goods or services they buy.
- Display the consequences of interest and wage fluctuations on saving and labor supply choices, factoring in the substitution and income effects.
- Set apart the substitution effect from the income effect in terms of their effects on consumer selection.
Verified Answer
CC
Learning Objectives
- Display the consequences of interest and wage fluctuations on saving and labor supply choices, factoring in the substitution and income effects.
- Set apart the substitution effect from the income effect in terms of their effects on consumer selection.
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