Consider a change in the tax code that reduces the tax paid of each dollar of income up to $250,000 per year. The tax rate on any dollars earned above $250,000 is unchanged. What is the effect of this change in the tax code on the labor supply of someone who earns $375,000 per year.

Labor supply falls because of the subsitition effect. There is no income effect.

Labor supply increases because of the substitution effect. There is no income effect.

Labor supply falls because of the income effect. There is no substitution effect.

Labor supply increases because of the income effect. There is no substituion effect.