Question

Surbhi is awake for 80 hours a week she earns Rs.100 for every hour that she works. explain the effect of an increase in the wage rate to Rs. 120 per hour on the number of hours worked using income and substitution effects.​

Answer 1

I think this is your answer

Answer 2

Income effects when the wage rate increases to Rs 120 per hour are:

• Surbhi will want to work even more to achieve higher targets and earn more. This is a positive income effect.
• Once Surbhi earns the desired amount, she may stop working efficiently and spend time leisurely. This is a negative income effect.

Substitution effects when the wage rate increases to Rs 120 per hour are:

• There will be an increase in Surbhi's opportunity cost of leisure.
• Higher wages will encourage Surbhi to work for longer hours.
• She might even stay awake for more than 80 hours a week.
• This is a substitution effect as Surbhi substitutes leisure and sleep with work.