Question

Consider an indifference curve for someone deciding how to allocate time between work (and thus consumption)...

Consider an indifference curve for someone deciding how to allocate time between work (and thus consumption) and leisure. Suppose the wage increases.

The substitution effect induces a person to work and consume   in response to higher wages. If consumption is a normal good, the income effect induces the person to consume   when the wage rises, but if consumption is an inferior good, the income effect induces the person to consume   in response to higher wages.

True or False: The person's consumption always rises as a result of the higher wage.

True

False

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Answer #1

Answer:

The substitution effect induces a person to work and consume more in response to higher wages. If consumption is a normal good, the income effect induces the person to consume rises when the wage rises, but if consumption is an inferior good, the income effect induces the person to consume lesser in response to higher wages.

The person's consumption always rises as a result of the higher wage.

False

Explanation:

When wage increases, substitution effect on leisure is negative and substitution effect on work and consumption is positive.

In case of normal goods, demand increases when income increases.

Given statement is false, If consumption is an inferior good, the higher wages will decrease the person's consumption.

This is because in case of inferior goods demand decreases when income increases.

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