If labor supply is increasing in the real wage,then
A) the substitution effect is larger than the income effect.
B) the income effect is larger than the substitution effect.
C) the production function is increasing in labor.
D) the marginal product of labor is decreasing.

Question

Quizplus · Accepted Answer

According to the law of supply, as the price of a good or service (in this case, the real wage) increases, the quantity supplied also increases. In the context of labor supply, the substitution effect occurs when workers choose to work more hours because the higher wage makes it more attractive compared to other leisure activities. On the other hand, the income effect occurs when the higher wage allows workers to afford more leisure time because they can now make the same amount of income in fewer work hours. However, because the question states that labor supply is increasing in response to the higher wage, we can conclude that the substitution effect of increased labor supply is greater than the income effect.

If Labor Supply Is Increasing in the Real Wage,then