An increase in the real wage will cause an individual to increase his or her supply of labour if
A)the substitution effect is greater than the income effect.
B)the income effect is greater than the substitution effect.
C)the substitution effect is equal to the income effect.
D)the substitution effect is negative and the income effect is positive.

Question

Quizplus · Accepted Answer

According to the substitution effect, as the real wage increases, the opportunity cost of leisure increases and individuals will substitute leisure time for work. This creates an upward slope of the labour supply curve. However, according to the income effect, as the real wage increases, individuals can afford more leisure time without sacrificing income, which creates a downward slope of the labour supply curve. If the substitution effect is greater than the income effect, the individual will increase their supply of labour as the increased wage makes leisure time more expensive relative to work.

An Increase in the Real Wage Will Cause an Individual