Question

When a good's price changes, that generates both an income and a substitution effect. As discussed in class, we can use utility theory to think about how many hours people choose to work. Suppose a worker has the freedom to choose how many hours they work. A cut in personal income taxes will increase labor hours for any individual if

the income effect dominates the substitution effect

the substitution effect dominates the income effect

the income and substitution effects exactly offset each other