Is leisure time considered an inferior good when the substitution effect dominates?
I think that the answer is yes because if you are willing to work more hours in order to make more money than you do not value leisure time that much.
Is this correct? Thank you!
Yes, you are correct! Leisure time can be considered an inferior good when the substitution effect dominates.
To understand why, let's first define the substitution effect and the income effect:
- The substitution effect refers to the change in consumption patterns that occurs when the price of a good or service changes, assuming that the consumer's real income remains constant. It involves substituting one good for another due to changes in relative prices.
- The income effect refers to the change in consumption patterns that occurs when the consumer's real income changes, assuming that the prices remain constant. It involves changes in consumption due to changes in purchasing power.
Now, let's apply these concepts to leisure time as a good. Suppose the wage rate increases, making work relatively more attractive from an economic perspective. In this case, the substitution effect dominates because the price of leisure (in terms of the forgone wage income) has increased. As a result, individuals may choose to work more hours and allocate less time to leisure activities.
However, it's important to note that not all individuals may respond the same way, as different people have different preferences for leisure and work. While some may indeed value leisure time less and choose to work more when the substitution effect dominates, others may still prioritize leisure time and choose to work fewer hours, even with the increased wage rate. Hence, whether leisure time is considered an inferior good ultimately depends on individual preferences and the relative strength of the substitution effect compared to the income effect.