The assumption that current-period labour supply is positively related to the current-period real wage is justified as long as the
A) income effect dominates the substitution effect in the short run.
B) income effect dominates the substitution effect in the long run.
C) substitution effect dominates the income effect in the short run.
D) substitution effect dominates the income effect in the long run.
E) substitution effect equals the income effect in the long run.

Question

Quizplus · Accepted Answer

The substitution effect suggests that as real wages increase, the opportunity cost of leisure rises, leading individuals to supply more labor. This effect dominates the income effect in the short run, where individuals are more likely to respond to wage changes by adjusting their labor supply.

The Assumption That Current-Period Labour Supply Is Positively Related to the Current-Period