Question

1. Jaylen is currently a journalist, working 25 hours a week and earning $1,000 a week. She has just been offered a job as an investment banker. The bank has given her the option to choose either a part-time or full-time position. In a part-time position, she would work 25 hours a week and earn $1,500 a week. In a full-time position, she would work 40 hours per week and earn $2,400 a week. Jaylen chooses to quit journalism and take the part-time investment-banking position. Which of the following statements is most accurate?
2. 1. The income effect dominates the substitution effect.
   2. The substitution effect dominates the income effect.
   3. The income and substitution effects cancel each other out.
   4. There is neither a substitution nor an income effect.

Answer 1

--> If the price of a good or wages increases, then there will be two different effects – known as the income and substitution effect.

--> Substitution effect :- according to this, an increase in the price of a good will encourage consumers to buy alternative goods. The substitution effect measures how much the higher price encourages consumers to buy different goods, assuming the same level of income.

--> The income effect :- this looks at how the price change affects consumer income. If price rises, it effectively cuts disposable income, and there will be lower demand for the good because of this fall in disposable income.

--> The substitution effect of higher wages means workers will give up leisure to do more hours of work because work has now a higher reward , but in the above case, working hours remains the same,so there is no substitution effect. However, with higher wages, he can maintain a decent standard of living through less work or same work hours. (income effect).

--> so answer is option a) income effect domaintes substitution effect.