Figure 20-3
-Figure 20-3 shows a worker's backward-bending supply curve of labor.Which of the following statements is correct?
A)The substitution effect of a change in the wage dominates the income effect at all points on the curve.
B)The income effect of a change in the wage dominates the substitution effect at all points on the curve.
C)Above W*, the substitution effect of a change in the wage dominates the income effect; below W*, the income effect dominates the substitution effect.
D)Above W*, the income effect of a change in the wage dominates the substitution effect; below W*, the substitution effect dominates the income effect.

Question

Figure 20-3 
-Figure 20-3 shows a worker's backward-bending supply curve of labor.Which of the following statements is correct?
A)The substitution effect of a change in the wage dominates the income effect at all points on the curve. 
B)The income effect of a change in the wage dominates the substitution effect at all points on the curve. 
C)Above W*, the substitution effect of a change in the wage dominates the income effect; below W*, the income effect dominates the substitution effect. 
D)Above W*, the income effect of a change in the wage dominates the substitution effect; below W*, the substitution effect dominates the income effect.

Quizplus · Accepted Answer

The backward-bending supply curve of labor illustrates that at lower wages (below W*), the substitution effect (the tendency to work more hours as wages increase) dominates the income effect (the tendency to work fewer hours as wealth increases). However, above a certain wage level (W*), the income effect dominates the substitution effect, leading individuals to work fewer hours as their income continues to increase, hence the curve bends backward.

Figure 20-3 -Figure 20-3 Shows a Worker's Backward-Bending Supply Curve of Labor.Which