Question: Assume that a Cobb-Douglas production function is a good representation of the economy, the substitution effect is stronger than the income effect, and that the

Assume that a Cobb-Douglas production function is a good representation of

Assume that a Cobb-Douglas production function is a good representation of the economy, the substitution effect is stronger than the income effect, and that the economy was initially at equilibrium. Suppose that Congress passes a law that guarantees all adults an annual income of $80,000 whether they work or not. If the real wage is completely flexible, what will happen to the equilibrium real wage rate and quantity of labor? The equilibrium real wage rate will decrease and the equilibrium quantity of labor will increase The equilibrium real wage rate will increase and equilibrium quantity of labor will increase The equilibrium real wage rate will increase and the equilibrium quantity of labor will decrease The equilibrium real wage rate will decrease and equilibrium quantity of labor will decrease

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