If Hong has preferences U(R,C)-min[40R,C], and her wage rises from $12 per hour

Question

If Hong has preferences U(R,C)-min[40R,C], and her wage rises from $12 per hour to $14 per hour, Hong will a) increase her hours of leisure because the opportunity cost of leisure has risen b) increase her hours of leisure because there is only an income effect, and not a substitution effect, for Leontief consumers c) decrease her hours of leisure according to the substitution effect O d) it is impossible to predict Hong's choice until we know whether or not the income effect dominates the substitution effect

Explanation / Answer

The correct answer is: b)

Reason: The given preference is of Leontief type and for these preferences, there is no substitution effect. The total effect is equal to the income effect.

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