Activity: Decomposing the Total Effect of a Wage Rise into Income and Substitution Effects

Analyzing a Change in Work Hours

A worker receives a significant hourly wage increase. They reflect on the change with two conflicting ideas:

• Idea A: "Since each hour of my free time now costs me more in lost earnings, I feel motivated to work additional hours."
• Idea B: "Since I can reach my weekly income goal faster, I feel I can afford to take more time off for leisure."

Which option correctly identifies the economic effects described in these ideas?

Consider an individual who experiences a wage increase. If this person chooses to work fewer hours, it is logically necessary that the income effect of the wage increase is greater in magnitude than the substitution effect for that individual.

A worker's hourly wage increases. Match each line of reasoning or observed outcome with the economic principle it primarily represents.

Evaluating a Labor Supply Decision

When an individual's wage increases, if the effect that makes leisure feel more affordable is stronger than the effect that makes leisure more costly in terms of lost earnings, the total quantity of labor supplied by that individual will ________.

Analyzing Divergent Worker Responses to a Pay Increase

Analyzing a Freelancer's Work-Life Decision

An economist observes that after a company-wide wage increase, employees responded differently, with some choosing to work more hours and others fewer. To explain any individual employee's choice, the economist must logically disentangle the two conflicting effects of the wage rise. Arrange the following analytical steps in the correct logical sequence that breaks down this decision-making process.

A Student's Work-Leisure Choice During a 10-Week Summer Break