Which of the following best explains why the elasticity of supply of labor for an individual with a Cobb-Douglas utility function (for consumption and leisure)is zero?

Question

Quizplus · Accepted Answer

The elasticity of supply of labor for an individual with a Cobb-Douglas utility function is zero because the income and substitution effects precisely offset each other. In the context of labor supply, when wages increase, the substitution effect makes leisure more expensive relative to consumption, encouraging more work (less leisure). Simultaneously, the income effect allows an individual to afford more leisure without changing consumption, encouraging less work. For a Cobb-Douglas utility function, these two effects exactly cancel out, leading to no change in the quantity of labor supplied when wages change.

Which of the Following Best Explains Why the Elasticity of Supply