Question

1. If a person responds to a tax on wages by working the same number of hours, then the:

a. substitution effect induces the individual to work more.

b. income effect exactly offsets the substitution effect.

c. income effect exceeds the substitution effect.

d. substitution effect exceeds the income effect.

The incorrect choices for this question are

"C. Income Effect exceeds the substitution effect." and

"D. Substitution effect exceeds the income effect."

Thus, the only possible correct choices for this question would be

"A. Substitution effect induces the individual to work more."

or

"B. Income effect exactly offsets the substitution effect."

Answer 1

Since option, A or B is probable choices, it shall be noted that the answer provided would focus on choosing the best of this option.

It shall further be noted that while responding to a tax on wages, a person work just the same number of hours, which means, the individual is not working for more hours.

This rules out option A as it says the individual is induced to work more.

Hence, the correct answer is B. Income effect exactly offsets the substitution effect.