Exhibit 12.3

-Refer to Exhibit 12.3 which shows a backward-bending labor supply curve for an individual.In the figure below,which of the following is true at a wage rate of $7?

Question

Exhibit 12.3
 
-Refer to Exhibit 12.3 which shows a backward-bending labor supply curve for an individual.In the figure below,which of the following is true at a wage rate of $7?

Quizplus · Accepted Answer

At a wage rate of $7, the wage rate is now high enough that the substitution effect dominates the income effect, causing the individual to supply more labor. Therefore, the individual will supply more than 20 hours of labor, but the exact amount cannot be determined from the given information. Choice B is the correct answer because it states that the substitution effect dominates the income effect, which is true at this wage rate.

Exhibit 12.3 -Refer to Exhibit 12.3 Which Shows a Backward-Bending Labor Supply