Final answer:
A rise in wages affects decisions about work and leisure by introducing income and substitution effects. As Vivian's wage increases, she may work more, maintain her work hours, or work less. These choices reflect her new budget constraint and her desired balance between earning money and having leisure time.
Step-by-step explanation:
When considering how a change in wage affects an individual's decisions about work and leisure, we analyze what economists call income and substitution effects. Vivian's case, where her wage increases from $10/hour to $12/hour, exemplifies these concepts. With a higher wage, she faces a new budget constraint that is steeper, indicating that for each hour she works, she can earn more than before, which can lead her to alter her allocation of time.
Three potential choices surface from this change:
- She may elect to work more hours to earn a higher income.
- She may keep her work hours the same, hence enjoy a higher income without altering her leisure.
- She could work fewer hours, maintaining her original income, but enjoying more leisure time.
Typically, as wages rise, the substitution effect often motivates people to work more because the opportunity cost of not working (the income foregone) has increased. Conversely, the income effect may lead some to work less, as they may require less work to achieve their desired income level. The balance between these effects will determine Vivian's choice on the labor-leisure tradeoff.