Labor supply
A) must necessarily increase when the real wage increases.
B) increases if the substitution effect exceeds the income effect.
C) is increasing and then decreasing in the real wage.
D) increases when taxes increase.

Question

Quizplus · Accepted Answer

According to the substitution effect, as the real wage increases, the opportunity cost of leisure time increases and individuals will be more willing to work at higher wages. On the other hand, the income effect suggests that as wages rise, workers will feel wealthier and therefore may choose to work less, known as leisure income effect. If the substitution effect is greater than the income effect, then labor supply will increase as the real wage increases.

Labor Supply