Assuming that leisure is a normal good, if an individual's labor supply curve is backward bending, then the
A) income effect outweighs the substitution effect at higher wages.
B) substitution effect outweighs the income effect at higher wages.
C) income effect and the substitution effects are equal.
D) income effect is zero.

Question

Quizplus · Accepted Answer

The backward bending supply curve of labor illustrates that at higher wages, the income effect (where individuals prefer more leisure as they can afford it, considering leisure a normal good) outweighs the substitution effect (where individuals substitute labor for leisure due to higher wages making work more financially rewarding). This leads to a decrease in labor supply as wages increase beyond a certain point.

Assuming That Leisure Is a Normal Good, If an Individual's