For a long time, your firm has been paying its workers a wage of $20 per hour and your employees have been happy to work 40 hours per week at this wage
Business is suddenly booming and your firm would really like your workers to agree to a 50-hour work week in order to meet this new demand for your product. You are considering two strategies. Under the first, you would raise the wage for all hours worked from $20 per hour to $22 per hour; under the second, you would leave the wage for the first 40 hours per week at $20 but offer $30 per hour for hours worked above 40 hours (that is, you would offer time and a half for overtime). Both strategies have the same cost of $1,100 if a worker chooses to work 50 hours. Which strategy is more likely to lead your employees to agree to a 50-hour work week?
The second strategy, because the substitution effect is much larger. Under the first strategy, workers will weigh the benefits of an additional hour of leisure against the wage you are offering of $22 . Under the second, they will weigh the benefits against the over-time wage of $30 . Some workers might actually choose to work less under the first strategy because of the income effect of a wage increase.
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a. True b. False Indicate whether the statement is true or false