Question

1. Consider an increase in the wage rate.
   1. Based on theory alone, will consumers want to work more or less?
      
   2. What justification do economists use for assuming the substitution effect dominates?
      

Answer 1

ANSWER

Wage can be defined as the amount of money a person receives for a particular work for a partcular period of time - it may be received daily, weekly, or monthly. Sometimes wages will be given on hourly basis too. Wage is always a monetary compensation.

In this case overtime compensation benefit is also available. Opportunity for holiday pay if we work on holidays is much higher. Dedicate our leisure time for some other subjects which we are really interested is another advantage.  

This has some disadvantaes too. They are hourly employees does not get flexible working hours. Even a 10 minutes late record is enough for him to reduce his wages.

There are three  types of wages - Living wages , Minimum wages and fair wages.

Living wage is defined as the minimum income received by an employee or a worker to meet his basic needs.  

Minimum wages are the lowest remuners employers can give to the workers as per law.

Fair wages

Minimum wage rate for a specific occupation is called fair wages.

A situation under increase in wage rate, will create an economic situation where cost of prodction is high. This is because labour cost is always included in the production cost. Hence the manufacturers comes under a situation were selling price increases. They will also forced to engage less number of labouers. Consumers will reduce their amount of purchasing and it will affect the total production considerably.

Substitution Effect

Substittion effect is the difference in sale in a dcreased point becuase of the increase in selling price of a particular commodity. Under such situation the existing consumers look for other alternatives which are comparatively cheaper. In short the increase in the price of a commodity makes more demand of an alternative product.

According to the economists when the substitution effect dominate workers will not come forward to do more amount of work becase they will get the expected amount in the form of wages for the minimum hours of work. They don't have to spend more hours. On the other hand if the substitutin effect is more than the income effect people do more amount of work.