Figure: Labor Supply 2 Refer to the figure. The figure represents the budget constraint and indifference curves for the labor-leisure decision of a consumer when the wage rate falls from $20 to $10. For this worker:

Question

Figure: Labor Supply 2  Refer to the figure. The figure represents the budget constraint and indifference curves for the labor-leisure decision of a consumer when the wage rate falls from $20 to $10. For this worker:

Quizplus · Accepted Answer

The figure shows that the budget constraint shifts inward, reducing the consumer's income. This leads to a decrease in the quantity of labor supplied due to income effect. However, the slope of the indifference curve at the initial equilibrium point implies that leisure is a normal good for the consumer. In other words, as income falls, the consumer will want to consume more leisure. This leads to a decrease in the quantity of labor supplied due to the substitution effect. Therefore, in this case, the substitution effect will dominate and the consumer will work less.

Figure: Labor Supply 2 Refer to the Figure