When income effects are very strong for the representative consumer ... any increase in his productivity...

When income effects are very strong for the representative consumer ...

any increase in his productivity will shift the AD curve farther to the right than the AS curve; the consumer wants to consume more of the produced goods but less leisure.

any increase in his productivity will shift the AD curve farther to the right than the AS curve; the consumer wants to consume more produced goods but not more leisure.

any increase in his productivity will shift the AS curve farther to the right than the AD curve; the consumer wants to consume more produced goods and leisure.

any increase in his productivity will shift the AS curve farther to the left than the AD curve; the consumer wants to consume less produced goods and leisure.

any increase in his productivity will shift the AD curve just as much as the AS curve; the consumer wants to consume less leisure.

Expert Solution

Leisure is a normal good. This implies that any increase in income will lead to increase in demand of leisure.

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Thus, a representative consumer will increase leisure hours in the case of strong income effect.

From this options (a), (b), (d) and (e) are rejected.

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Also, productivity refers to number of output produced per unit of input. Increase in productivity implies more units of output are being produced in an economy. This further shifts the AS curve rightward.

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Hence, correct answer is option (c) i.e., any increase in consumer’s productivity will shift AS curve farther to the right than the AD curve; the consumer wants to consume more produced goods and leisure

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Rahul Sunny answered 1 day ago

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