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Arielis currently working 45 hours per week at $33 per hour when herboss raises herwage to...

Arielis currently working 45 hours per week at $33 per hour when herboss raises herwage to $37 per hour. Since leisure is now more expensive, the substitution effect guarantees that Arielwill work more hours at the new higher wage rate than she did at the old rate? True or False? You must prove your answer graphically.

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Answer #1

For a worker, if the wage rate increases, then work becomes relatively more profitable than leaisure (and henxe leisure becomes coslty). This is called the substitution effect.

However, with higher wages, he can now maintain the same standard of living with lower wages. This is the income effect.

If substitution effect is greater than income effect, the worker will work more hourse with an increase in wages, and hence the labor supply curve will be upward sloping. However, after a certain wage, the worker would not be able to work more. Then the income effect will dominate the substitution effect amd the labor supply curve will bend backwards.

Thus, it is not always true that the worker will work more hours at the new higher wage rate.

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