In order for a labour supply curve to be backward bending at high wages,
A)leisure must be an inferior good.
B)the substitution effect of a wage increase must be greater than the income effect.
C)workers must have an irrational response to wage increases.
D)the income effect of a wage increase must be greater than the substitution effect.

Question

Quizplus · Accepted Answer

According to the backward bending labour supply curve, at high wages, the income effect dominates the substitution effect such that workers may choose to work fewer hours as their income has already satisfied their needs and wants. Therefore, the correct answer is D, which states that the income effect of a wage increase must be greater than the substitution effect. Choice A is incorrect because backward bending labour supply curve does not depend on leisure being an inferior good. Choice B is incorrect because the backward bending labour supply curve assumes that the substitution effect is smaller than the income effect. Also, choice C is incorrect because workers' response to wage increases are rational, but their preferences and circumstances change as their wages increase.

In Order for a Labour Supply Curve to Be Backward