Lakisha's labour supply curve is downward sloping for wage rates greater than $40 per hour and upward sloping for wage rates less than $40 per hour.If leisure is a normal good for Lakisha and if the wage is _____,the substitution effect of a wage increase is _____ than the income effect.
A) greater than $40;greater
B) equal to $18;less
C) greater than $40;less
D) greater than $20;less

Question

Quizplus · Accepted Answer

Since Lakisha's labour supply curve is downward sloping for wage rates greater than $40 per hour and upward sloping for wage rates less than $40 per hour, she exhibits backward-bending labour supply curve.

If leisure is a normal good for Lakisha, then the income effect of a wage increase will be negative, which means that as her wage rate increases, her purchasing power will increase, and she may choose to work less and increase her leisure time.

However, the substitution effect of a wage increase will be positive, which means that as her wage rate increases, the opportunity cost of leisure time increases, and hence she will choose to work more.

Since the labour supply curve is backward-bending, the substitution effect of a wage increase is less than the income effect only when the wage rate is greater than $40. Therefore, the correct answer is (C) greater than $40 and less.

Lakisha's Labour Supply Curve Is Downward Sloping for Wage Rates