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Unformatted text preview: choose more consumption; the effect on the level of labor and leisure is uncertain. If we assume that the substitution effect is stronger, then workers will choose to work more and play less, which makes sense, since a higher wage would give workers more incentive to work. Figure %: Income and Substitution Effects on the Consumption/Leisure Decision Is this always true, that the substitution effect outweighs the income effect? Some economists believe that it is initially true, at relatively low wage levels. However, as the wage gets progressively higher, they believe that the income effect begins to outweigh the substitution effect, and very high wage-earners will begin to choose leisure over consumption even if their wage increases. (Maybe that's why corporate bigwigs have the reputation of having too much free time to gallivant around on tropical islands)....
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This note was uploaded on 02/09/2012 for the course ECO ECO2013 taught by Professor Jominy during the Fall '08 term at Broward College.
- Fall '08