Chapter 71, Problem 1MCQ

To determine

The correct option where people work more when their wage rate increases.

Answer to Problem 1MCQ

From the available options, the correct option is substitution effect dominates the income effect.

Explanation of Solution

The substitution effect will dominate the income effect when an increase in wage rate induces the people to work more because the income effect is small and an increase in wage rate increases the price of leisure, which induces the labor to work more to substitute the goods with the goods whose price has increased.

Therefore, there would be a large substitution effect that dominates the income effect which means option d is correct and all other options are incorrect.

Economics Concept Introduction

Introduction: Substitution effect refers to a change in income or price that will affect people to move to other substitutes, and income effect refers to the change in income that causes the demand for a good or service in the market.