Asked by M'Kayla McGee on Jul 03, 2024
Verified
Shelley wins $1 million in her state's lottery. If Shelley keeps working after she wins the money, we can infer that the substitution effect must exactly offset the income effect for her.
Substitution Effect
The economic understanding that as prices rise or incomes decrease, consumers will replace more expensive items with less costly alternatives.
Income Effect
The variation in a person's or economy's earnings and the effect of this variation on the demanded quantity of a product or service.
- Differentiate between the effects of substitution and income on labor supply and consumption choices.
Verified Answer
ZK
Zybrea KnightJul 04, 2024
Final Answer :
False
Explanation :
The substitution and income effects describe how individuals might change their labor supply in response to changes in income or wages, but an individual continuing to work after winning the lottery does not necessarily mean these two effects exactly offset each other. Shelley might continue working for reasons unrelated to these effects, such as personal fulfillment, social reasons, or a desire to accumulate more wealth.
Learning Objectives
- Differentiate between the effects of substitution and income on labor supply and consumption choices.
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