Final answer:
The correct answer is D) Higher wages lead to a decrease in labor supply due to the income effect, as individuals may prefer to enjoy more leisure time, which is a normal good.
Step-by-step explanation:
The impact of higher wages on labor supply according to the income effect can be assessed by understanding two opposing effects: the substitution effect and the income effect. With higher wages, the substitution effect encourages workers to supply more labor because earning income is relatively cheaper compared to leisure, whose opportunity cost has increased. However, the income effect tends to reduce labor supply because as individuals become wealthier, they often prefer more leisure, a normal good, which can mean working fewer hours.
Thus, the answer to the student's question is D) Higher wages lead to a decrease in labor supply due to the income effect. It's important to note, though, that the overall effect on labor supply depends on whether the substitution effect or the income effect is stronger. While the income effect predicts a decrease in labor supply with higher wages, the substitution effect predicts an increase. The actual outcome can only be determined by empirical data.