The assumption that current-period labor supply is positively related to the current-period real wage is justified as long as the
A) income effect dominates the substitution effect in the short run.
B) income effect dominates the substitution effect in the long run.
C) substitution effect dominates the income effect in the short run.
D) substitution effect dominates the income effect in the long run.

Question

Quizplus · Accepted Answer

The substitution effect suggests that as wages increase, labor supply increases because work becomes more rewarding compared to leisure. This effect must dominate for labor supply to be positively related to real wages.

The Assumption That Current-Period Labor Supply Is Positively Related to the Current-Period