Asked by Kayla Driffin on Jun 30, 2024
Verified
Assuming that leisure is a normal good, if an individual's labor supply curve is upward sloping, then the
A) income effect outweighs the substitution effect at higher wages.
B) substitution effect outweighs the income effect at higher wages.
C) income effect and the substitution effects are equal.
D) income effect is zero.
Labor Supply Curve
A graphical representation showing the relationship between the wage rate and the quantity of labor that workers are willing to offer at different wage rates.
Income Effect
The change in an individual's consumption patterns resulting from a change in their real income.
Substitution Effect
The change in consumption patterns due to a change in the relative prices of goods, leading consumers to replace more expensive items with less expensive ones.
- Acknowledge the relationship involving wage rates and the supply of labor, including the dynamics of income and substitution.
- Absorb the concept of the labor supply curve and observe its adjustment to changes in wages, reflecting on the importance of income and substitution effects.
Verified Answer
ZK
Zybrea KnightJul 04, 2024
Final Answer :
B
Explanation :
When an individual's labor supply curve is upward sloping, it indicates that as wages increase, the individual is willing to work more hours. This behavior is explained by the substitution effect outweighing the income effect at higher wages. The substitution effect refers to the tendency of individuals to substitute labor for leisure as the wage rate increases, making leisure relatively more expensive. The income effect, which could lead to working fewer hours because higher wages increase overall income and thus the demand for leisure (a normal good), is less dominant in this scenario.
Learning Objectives
- Acknowledge the relationship involving wage rates and the supply of labor, including the dynamics of income and substitution.
- Absorb the concept of the labor supply curve and observe its adjustment to changes in wages, reflecting on the importance of income and substitution effects.