If the income effect is stronger than the substitution effect, then the labor supply curve will be backward-bending.

Question

Quizplus · Accepted Answer

If the income effect (resulting from an increase in wages) leads people to work less because they can now afford to consume more leisure, and this effect is stronger than the substitution effect (resulting from higher wages making work more attractive), then the labor supply curve will start to bend backwards at a certain point. This means that at higher wages, people may actually choose to work less, despite the increased financial incentive to work more.

If the Income Effect Is Stronger Than the Substitution Effect