John is an entrepreneur who runs his own auto body repair shop.John's business is booming, and his salary is rising.John's labor supply curve will be:

Question

Quizplus · Accepted Answer

When John's salary rises, he has a higher opportunity cost of not working, and thus, he will want to work more, leading to an income effect that encourages him to supply more labor. However, as John's business booms and he becomes more successful, he may feel more comfortable reducing his overall labor supply, leading to a substitution effect that could discourage him from supplying more labor. If the income effect is stronger than the substitution effect, the labor supply curve would shift to the right, leading to upward sloping labor supply. If the substitution effect is stronger than the income effect, the labor supply curve would shift to the left, leading to downward sloping labor supply. Therefore, as John's business booms and his salary rises, his labor supply curve will be downward sloping if the substitution effect is smaller than the income effect.

John Is an Entrepreneur Who Runs His Own Auto Body