The labor supply curve may have a backward bending portion because at higher wages the
A) income effect is smaller than the substitution effect.
B) income effect is larger than the substitution effect.
C) income effect is negative.
D) Any of the above could result in a backward-bending supply curve.

Question

Quizplus · Accepted Answer

At higher wages, the income effect becomes larger than the substitution effect, causing individuals to potentially decrease their labor supply as they are already earning enough income to fulfill their desired consumption levels. This leads to the backward bending portion of the labor supply curve.

The Labor Supply Curve May Have a Backward Bending Portion