motivation encourages a utility-maximizer to buy more of both goods if utility rises or less of both goods if

utility falls (if they are both normal goods).

In a labor-leisure choice, every wage change has a substitution and an income effect. The substitution effect of

a wage increase is to choose more income, since it is cheaper to earn, and less leisure, since its opportunity
532 B • Indifference Curves

cost has increased. The income effect of a wage increase is to choose more of leisure and income, since they

are both normal goods. The substitution and income effects of a wage decrease would reverse these directions.

In an intertemporal consumption choice, every interest rate change has a substitution and an income effect.

The substitution effect of an interest rate increase is to choose more future consumption, since it is now

cheaper to earn future consumption and less present consumption (more savings), since the opportunity cost
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