Question

Daniel had been earning ​$67 per hour and working 45 hours per week. Then​ Daniel's wage changes to ​$76 per​ hour, and as a​ result, he now works 40 hours per week. What can we conclude from this information about the income effect and the substitution effect of a wage change for​ Daniel? The substitution effect causes Daniel to devote ▼ less the same amount of more time to working​, the income effect causes Daniel to devote ▼ less the same amount of more time to working​, and the substitution effect is ▼ larger than the same size as smaller than the income effect.

Answer 1

Step-by-step explanation:

When we talk about wages and labor hours, we can observe the choice a worker has between leisure and work. In this case, Daniel's wage increased from $67 to $76 per hour, meaning that for him, work becomes more profitable than leisure, as he's earning more per hour that he works. In this case, the substitution effect shows how attractive it can be for Daniel to give up leisure to do more hours of work because of a higher reward. However, as his wage is higher now, the income effect highlights the possibilities of keeping up with a decent standard of living, without spending as many hours as he did before working. He has the possibility to increase his leisure hours, as he's been paid more per hour worked.