The supply of labour bends backward because as the wage rate becomes very high:
A)the opportunity cost of leisure declines.
B)the income effect becomes greater than the substitution effect.
C)the substitution effect becomes greater than the income effect.
D)the substitution effect and income effect work in the same direction.

Question

Quizplus · Accepted Answer

When the wage rate becomes very high, individuals may value their leisure time more than the additional income earned from working extra hours. This is because their basic needs are already met, and the additional income does not significantly improve their well-being. As a result, the income effect (where people choose more leisure as their income increases) becomes greater than the substitution effect (where people work more hours because the wage rate is higher), leading to a decrease in labor supply. This phenomenon explains why the labor supply curve can bend backward at high wage rates.

The Supply of Labour Bends Backward Because as the Wage