Exhibit 12.1

-Refer to Exhibit 12.1,which shows a backward-bending labor supply curve for an individual.Along which part of the labor supply curve in the figure above does the income effect of a wage change just equal the substitution effect?

Question

Exhibit 12.1
 
-Refer to Exhibit 12.1,which shows a backward-bending labor supply curve for an individual.Along which part of the labor supply curve in the figure above does the income effect of a wage change just equal the substitution effect?

Quizplus · Accepted Answer

The income effect and substitution effect are equal at the point where the labor supply curve is the most elastic, which is at point b. Between points b and c, the income effect is larger than the substitution effect, while between points a and b, the substitution effect is larger than the income effect. Therefore, the correct choice is between points b and c.

Exhibit 12.1 -Refer to Exhibit 12.1,which Shows a Backward-Bending Labor Supply Curve