Yousef a lawyer has just received a wage increase from 35 pe

Yousef, a lawyer, has just received a wage increase from $35 per hour to $40 per ho result, Yousef decides to work fewer hours every month. For Yousef: The income effect of the wage increase dominates the substitution effect The substitution effect of the wage increase dominates the income effect The wage increase has a substitution effect only. The wage increase has a demand effect only.

Solution

When wage of lawyer has increased it is known as price effect. Wages is the price paid to laborer for hiring their service. There are two impact of price change. They are

1. Income effect and

2. Substitution effect

These two effects are analysed below:

1. Income effect: Whe price of labor (i.e. wage rate) is increased, the income of labor per hour is rising from $35 to $40. It will induce worker to work more hour to increase his earnigs. Thus worker will work for more hours.

2. Substitution effect: Man is ot a machine. So contiuous increase in wage rate will not induce him to work more and more hours. When a reasonable amount of wages has been earned, he will prefer leisure. So instead of increasing production hour, he will increase leisure hours to maximize his overall satisfaction. Thus substitution effect will reduce productive hour.

Combined effect of the two will determine whether fewer working hour will be worked or not. If income effect is stronger than substitution effect, then he will decide to work for more hours. But in this problem, worker has decided to work for fewer hours. So substitution effect is stronger than income effect.

Answer: Option B is correct.