Assuming that leisure is a normal good, if an individual's labor supply curve is upward sloping, 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

When an individual's labor supply curve is upward sloping, it indicates that as wages increase, the individual is willing to work more hours. This behavior is explained by the substitution effect outweighing the income effect at higher wages. The substitution effect refers to the tendency of individuals to substitute labor for leisure as the wage rate increases, making leisure relatively more expensive. The income effect, which could lead to working fewer hours because higher wages increase overall income and thus the demand for leisure (a normal good), is less dominant in this scenario.

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