Consider a worker whose choice is between hours of free time and consumption. His company has cut his wage rate. Which of the following statements is correct?
Understand the Problem
The question is about the impact of a wage cut on a worker's choice between free time and consumption. It asks which statement about the worker's response to the wage cut is correct, indicating a study of economic concepts related to income and substitution effects.
Answer
The income effect means the worker would increase his free time.
The income effect means that the worker would increase his free time.
Answer for screen readers
The income effect means that the worker would increase his free time.
More Information
When wages decrease, the substitution effect may lead to increased leisure, as the opportunity cost of leisure decreases. However, the income effect can cause the worker to work more or less, depending on personal circumstances.
Tips
Confusing substitution and income effects is common. Always consider which tends to dominate in given scenarios.
Sources
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