Activity: Mathematically Proving the Decomposition Results of Figure E3.4

An architect receives a substantial, permanent increase in her hourly billing rate. In response, she decides to reduce her weekly working hours to spend more time on personal projects. Which statement provides the most accurate economic explanation for her decision?

Analyzing a Worker's Response to a Wage Increase

Decomposition of a Wage Change on Labor Supply

A worker's hourly wage increases. This change creates two distinct and opposing pressures on their decision about how much free time to take. Match each economic effect with its correct description.

Following a significant increase in their hourly wage, a freelance graphic designer decides to work fewer hours per week. This decision implies that, for this individual, the substitution effect of the wage change on their choice of free time was stronger than the income effect.

Worker's Response to a Wage Increase

An economist is analyzing the impact of a wage increase on a worker's choice of free time. To separate the two opposing pressures this creates, the total change is broken down into two distinct components. Arrange the steps of this analytical decomposition in the correct logical order.

When a wage increase causes a worker to reduce their hours and take more free time, it implies that for this individual, the ____ effect, which encourages more leisure as they feel wealthier, is stronger than the substitution effect.

Contrasting Responses to a Wage Increase

An employee receives a significant hourly wage increase. After the raise, the employee chooses to work the exact same number of hours as before, meaning their amount of free time is also unchanged. How can this outcome be best explained by the economic effects of the wage change?