Question

A temporary increase in the wage rate is likely to (decrease/ increase/ not change)

the amount of labor supplied because for temporary wage changes,
a) the income effect is likely to equal the substitution effect
b) the income effect is likely to be less than the substitution effect
c) the income effect is likely exceeds the substitution effect

Answer 1

For a temporary increase in the wage rate, the amount of labor supplied is likely to increase as the income effect is less than the substitution effect(b).

Step-by-step explanation:

In a labor-leisure choice, every wage change has a substitution and an income effect. The substitution effect of a wage increase is to choose more income, since it is cheaper to earn, and less leisure, since its opportunity cost has increased. The income effect of a wage increase is to choose more of leisure and income, since they are both normal goods. The substitution and income effects of a wage decrease would reverse these directions.

When it comes to a temporary increase in the wage rate, the income effect is likely to be less than the substitution effect(b). This means that the amount of labor supplied will increase as a temporary wage increase makes it more attractive to work for more income.