Answer and explain! 9. omer works at the local nuclear power plant for 40 hours

Question

Answer and explain!

9. omer works at the local nuclear power plant for 40 hours per week.Homers boss decides to decrease his hourly wage and in response Homer decreases his work hours to 35 hours per week. The substitution effect on leisure from the wage change is the income effect on leisure from the wage change is and the dominates. (Midterm 2 a. negative positive; income effect b. negative positive; substitution effect c. positive negative income effect d. positive negative; substitution effect e. None of the above

Explanation / Answer

A fall in wage rate leads to 2 effects: Income effect and substitution effect.

Income effect makes the laborer poorer with a fall in wage rate. As a result, he increases his work hours and decreases leisure in order to earn more income.

Substitution effect makes leisure expensive. Laborer increases leisure and decreases labor hours.

In this case, a fall in wage rate leads to a fall in labor hours. Thus, clearly it is the substitution effect which dominates here.

Thus, the correct option will be: (D) positive,negative,substitution effect.

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