If a person supplies fewer hours of labor in response to a wage increase,then
A) the substitution effect is greater than the income effect.
B) the income effect is greater than the substitution effect.
C) the income effect equals the substitution effect.
D) the person is not maximizing utility.

Question

Quizplus · Accepted Answer

This scenario is known as the backward-bending supply curve of labor, where the income effect dominates the substitution effect. As the wage increases, individuals may choose to work fewer hours since they now have more income and can afford to work less. This is particularly true for high-income earners who may value leisure time more than additional income. Therefore, the income effect is greater than the substitution effect.

If a Person Supplies Fewer Hours of Labor in Response