An economic model depicts a person's trade-off between daily free time and consumption. Initially, the person chooses an optimal combination of work and leisure. After receiving a significant hourly wage increase, their set of possible consumption-leisure combinations expands. The model then shows two potential outcomes for two different individuals facing this same wage increase: Individual A chooses to work fewer hours than before, while Individual B chooses to work more hours. What fundamental principle does this divergence in outcomes illustrate?

Divergent Responses to a Wage Increase

Analyzing Divergent Labor Supply Choices

Explaining Divergent Labor Supply Decisions

According to the standard model of labor-leisure choice, a rational individual will always choose to work more hours following an increase in their hourly wage, as this makes each hour of leisure more expensive.

When an individual's wage increases, their decision on how many hours to work is influenced by two opposing forces. Match each scenario describing the relative strength of these forces with the resulting change in the individual's work hours.

Contrasting Responses to a Wage Increase

An economic model shows an individual's trade-off between daily consumption and free time. Initially, their budget constraint allows for a certain set of choices, and they select an optimal point 'A'. Following an hourly wage increase, their budget constraint pivots outward, becoming steeper and expanding their set of possible choices.

Consider two individuals, both facing this identical wage increase.

• Individual 1's new optimal point, 'B', involves more consumption and also more free time than at point 'A'.
• Individual 2's new optimal point, 'C', involves more consumption but less free time than at point 'A'.

What does the divergence between choosing point 'B' versus point 'C' primarily reveal?

Predicting Labor Supply Choices Based on Priorities

Predicting Labor Supply Responses to a Wage Increase