In order for a labor supply curve to be backward bending at high wages,
A)leisure must be an inferior good.
B)the substitution effect of a wage increase must be greater than the income effect.
C)workers must have an irrational response to wage increases.
D)the income effect of a wage increase must be greater than the substitution effect.

Question

Quizplus · Accepted Answer

The income effect of a wage increase refers to the change in the amount of leisure that workers demand as a result of an increase in their income, while the substitution effect refers to the change in the amount of leisure that workers demand as a result of a change in the relative price of leisure to goods and services. When a labor supply curve is backward bending at high wages, it means that the income effect of a wage increase is greater than the substitution effect, leading workers to demand more leisure as their income increases beyond a certain threshold.

In Order for a Labor Supply Curve to Be Backward