Suppose that Professor Jones receives a promotion and an increase in her annual salary.Her labour supply curve will be _____ if the substitution effect is _____ than the income effect.

Question

Quizplus · Accepted Answer

When the substitution effect is greater than the income effect, the individual's labor supply curve will be upward sloping. This is because the substitution effect leads individuals to work more as the wage rate increases since the opportunity cost of leisure time has increased. However, the income effect may either reinforce or weaken the substitution effect. If the income effect is smaller, the overall effect will reinforce the substitution effect and lead to a steeper upward sloping labor supply curve. Therefore, choice A is the correct answer.

Suppose That Professor Jones Receives a Promotion and an Increase