Sasha's labor supply curve is downward sloping for wage rates greater than $60 per hour and upward sloping for wage rates less than $60 per hour. If leisure is a normal good for Sasha, and if the wage is _____, the substitution effect of a wage increase is _____ than the income effect.

Question

Quizplus · Accepted Answer

If Sasha's labor supply curve is downward sloping for wage rates greater than $60 per hour, it means that at wages above $60 per hour, Sasha is willing to work fewer hours as the wage rate increases. This implies that the substitution effect dominates the income effect at higher wage rates. On the other hand, if the labor supply curve is upward sloping for wage rates less than $60 per hour, it means that at wages below $60 per hour, Sasha is willing to work more hours as the wage rate increases. This implies that the income effect dominates the substitution effect at lower wage rates. Therefore, if the wage rate is greater than $60 per hour, the substitution effect of a wage increase is smaller than the income effect, which means that Sasha will increase her labor supply in response to a wage increase. Choice C fits this scenario.

Sasha's Labor Supply Curve Is Downward Sloping for Wage Rates