Explain the income effect and the substitution effect due to an increase in the wage rate
What will be an ideal response?
An increase in income will lead to a higher demand for leisure. However, an increase in the wage rate will also make leisure more expensive. Since these two effects are moving in opposite directions of one another theory alone cannot tell us the net effect without knowing the absolute change of the income and substitution effects.
You might also like to view...
In the balance of payments accounts, a net importer of capital is a nation that
a. sells more goods in foreign countries than it imports b. buys more goods from foreign countries than it exports c. sells more assets to individuals in other countries than the assets it buys from them d. buys more assets from individuals in other countries than the assets it sells to them e. imports less machinery than it exports
Provisions that allow the contract price of a commodity to change with changes in its market price are referred to as:
a. omnibus clauses. b. escape clauses. c. adjustment clauses. d. exclusion clauses.