A backward-bending supply curve of labor shows that at relatively low wages the:
A) income effect dominates the substitution effect, and the supply curve has a positive slope.
B) income effect dominates the substitution effect, and the supply curve has a negative slope.
C) substitution effect dominates the income effect, and the supply curve has a positive slope.
D) substitution effect dominates the income effect, and the supply curve has a negative slope.

Question

Quizplus · Accepted Answer

The substitution effect dominates the income effect at relatively low wages, leading to a positive slope of the supply curve of labor. This is because as wages increase from low levels, people are incentivized to work more, substituting labor for leisure due to the higher returns from working.

A Backward-Bending Supply Curve of Labor Shows That at Relatively