What is the combined effect (both income and substitution)of a wage increase?
A)The substitution effect always dominates, leading to more work at a higher wage.
B)The income effect always dominates, leading to less work at a higher wage.
C)If the substitution effect outweighs the income effect, the labour supply curve slopes upward, but if the income effect outweighs the substitution effect, the labour supply curve is backward bending.
D)If the substitution effect outweighs the income effect, the labour supply curve is backward bending, but if the income effect outweighs the substitution effect, the labour supply curve slopes upward.

Question

Quizplus · Accepted Answer

The combined effect of a wage increase includes both the substitution and income effects. If the substitution effect (where higher wages make leisure more expensive relative to work, encouraging more work) outweighs the income effect (where higher wages allow an individual to afford more leisure, potentially working less), the labor supply curve slopes upward. Conversely, if the income effect dominates, the labor supply curve can be backward bending, indicating a decrease in labor supplied as wages increase beyond a certain point.

What Is the Combined Effect (Both Income and Substitution)of a Wage