Lakisha's labor supply curve is downward sloping for wage rates greater than $40 per hour and upward sloping for wage rates less than $40 per hour.If leisure is a normal good for Lakisha and if the wage is _____,the substitution effect of a wage increase is _____ than the income effect.
A)greater than $40;greater
B)equal to $18;less
C)greater than $40;less
D)greater than $20;less

Question

Quizplus · Accepted Answer

Since Lakisha's labor supply curve is downward sloping for wage rates greater than $40 per hour and upward sloping for wage rates less than $40 per hour, we know that her reservation wage is $40 per hour. This means that if the wage is greater than $40 per hour, the substitution effect dominates the income effect and vice versa for wages less than $40 per hour. Therefore, if the wage is greater than $40 per hour, the substitution effect of a wage increase is greater than the income effect. Choice C is the only one that satisfies these conditions.

Lakisha's Labor Supply Curve Is Downward Sloping for Wage Rates