Scenario 14.1
A worker in Firm A earns an income of $5,000 per month. He has been offered a job in Firm B where he will be paid a salary of $7,000 per month.
-It is said that a wage increase can have two opposing effects. Which of the following captures these two effects?

Question

Quizplus · Accepted Answer

A wage increase can have two opposing effects on labor supply. On one hand, workers may want to work more to earn the higher income. On the other hand, workers may feel that they can afford to work less since they are already earning more money. This creates a backward-bending labor-supply curve where at some point, the income effect dominates and workers reduce the amount they work in response to a wage increase.

Scenario 14.1 A Worker in Firm a Earns an Income of $5,000