The representative consumer's current labour supply curve slopes upward under the assumption that
A)the substitution effect of an increase in the real wage is less than the income effect.
B)the substitution effect of an increase in the current labour supply outweighs the income effect.
C)there is an indirect relationship between the current real wage and current labour supply.
D)the substitution effect of an increase in the real wage outweighs the income effect.
E)the substitution effect of an increase in the current labour supply is less than the income effect.

Question

Quizplus · Accepted Answer

The upward sloping labor supply curve of the representative consumer assumes that the substitution effect of an increase in the real wage outweighs the income effect. This means that as the real wage increases, the opportunity cost of leisure time increases, and the consumer is willing to work more hours to earn the higher real wage. This is the substitution effect. However, as the real wage increases, the consumer also becomes wealthier and may choose to work fewer hours because of the increased income. This is the income effect. Since the substitution effect dominates, the labor supply curve slopes upward.

The Representative Consumer's Current Labour Supply Curve Slopes Upward Under