The combined effect (both income and substitution)of a wage increase is that
A)the substitution effect always dominates, leading to more work at a higher wage.
B)the income effect always dominates, leading to less work at a higher wage.
C)if the substitution effect outweighs the income effect, the labor supply curve slopes upward, but if the income effect outweighs the substitution effect, the labor supply curve is backward bending.
D)if the substitution effect outweighs the income effect, the labor supply curve is backward bending, but if the income effect outweighs the substitution effect, the labor supply curve slopes upward.

Question

Quizplus · Accepted Answer

The substitution effect encourages more work as wages increase, while the income effect can lead to less work as individuals can maintain the same income with fewer hours. If the substitution effect is stronger, the labor supply curve slopes upward; if the income effect is stronger, it can bend backward.

The Combined Effect (Both Income and Substitution)of a Wage Increase