When the income effect from a wage increase is greater than the substitution effect, the supply curve for labor:
A) slopes upward.
B) is vertical.
C) is horizontal.
D) slopes downward.

Question

Quizplus · Accepted Answer

When the income effect dominates the substitution effect, an increase in wages increases the amount of goods and services that can be purchased with the higher income. This leads workers to prefer working fewer hours and enjoying more leisure time, resulting in a downward sloping supply curve for labor.

When the Income Effect from a Wage Increase Is Greater