Questions are based on the following diagram, which shows a labor supply curve for an individual.

-If the wage rises from W₁ to W₂ we may conclude that:

Question

Questions are based on the following diagram, which shows a labor supply curve for an individual. -If the wage rises from W₁ to W₂ we may conclude that:

Quizplus · Accepted Answer

When the wage rises from W₁ to W₂, the budget constraint shifts outward, resulting in an increase in the individual's real income. This increase has an income effect that would lead the individual to consume more leisure and work less. However, the increase in the wage rate provides an incentive for the individual to supply more labor, leading to a substitution effect where the individual would work more. The strength of these two effects depends on the individual's preferences, but in this case, the substitution effect is stronger than the income effect, leading to a positive slope of the labor supply curve. Therefore, the correct answer is C, the substitution effect is stronger than the income effect.

Questions Are Based on the Following Diagram, Which Shows a Labor