Chapter 71, Problem 2MCQ

To determine

The correct option that induces people to work more when their wage rate decreases.

Answer to Problem 2MCQ

From the available options, the correct option is the income effect.

Explanation of Solution

The income effect causes to increase in working hours when the wage rate decreases because when the wage rate decreases, then the income of workers also decreases a decline in the consumption of normal goods. This would affect their leisure time and induce them to invest their leisure time to work for more hours to become able to consume normal goods. Whereas, if the desire for leisure increased, then people will reduce the number of working hours.

Therefore, there would be a large income effect and no substitution effect, which means option a is correct and all other options are incorrect.

Economics Concept Introduction

Introduction: Substitution effect refers to a change in income or price that will affect people to move to other substitutes, and income effect refers to the change in income that causes the demand for a good or service in the market.