A backward-bending labor supply curve implies that
A) the substitution effect dominates the income effect at higher wage rates but not at lower wage rates.
B) the substitution effect dominates the income effect at lower wage rates but not at higher wage rates.
C) leisure is an inferior good.
D) workers are irrational.

Question

Quizplus · Accepted Answer

A backward-bending labor supply curve implies that as wages increase, individuals may choose to work fewer hours because the income effect of the wage increase allows them to enjoy more leisure time. At lower wage rates, the substitution effect dominates - individuals may choose to work more hours to increase their income. However, at higher wage rates, the income effect can dominate, and individuals may prefer to work fewer hours even though they could earn more. Therefore, the backward-bending labor supply curve indicates that the substitution effect dominates at lower wage rates but not at higher wage rates. Choice A is incorrect because it suggests that the substitution effect dominates at higher wage rates, which is not consistent with a backward-bending labor supply curve. Choice C is incorrect because a backward-bending labor supply curve does not necessarily indicate that leisure is an inferior good. Choice D is incorrect because it implies that workers are making irrational choices, which is not necessarily the case with a backward-bending labor supply curve.

A Backward-Bending Labor Supply Curve Implies That