If you know that the substitution effect dominates the income effect when Joe's wage rises, you can tell that his labor supply curve is:
A) upward-sloping.
B) downward-sloping.
C) vertical.
D) upward-sloping at an increasing rate.
E) downward-sloping at an increasing rate.

Question

Quizplus · Accepted Answer

If the substitution effect dominates, it means that the increase in wage makes working more attractive relative to leisure. Therefore, Joe would tend to substitute leisure for work, leading to an increase in labor supply. This is consistent with an upward-sloping labor supply curve.

If You Know That the Substitution Effect Dominates the Income