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 when the wage rate increases from $9 to $11?

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 when the wage rate increases from $9 to $11?

Quizplus · Accepted Answer

The substitution effect, which makes leisure more expensive relative to work as wages increase, initially encourages more work hours. However, beyond a certain point, the income effect, which allows a person to maintain the same standard of living with fewer work hours due to higher income, dominates and leads to a decrease in work hours. This results in the backward-bending labor supply curve. When the wage rate increases from $9 to $11, the substitution effect initially dominates, leading to more work hours, but as wages continue to increase, the income effect becomes stronger and cancels out the substitution effect, leading to fewer work hours.

Exhibit 12.3 -Refer to Exhibit 12.3,which Shows a Backward-Bending Labor Supply Curve