Question

The supply curve of labor is upward sloping if:____________
a) the substitution effect dominates the income effect.
b) the income effect dominates the substitution effect.
c) the substitution effect equals the income effect. all of the above.

Answer 1

Answer:

Option A, “the substitution effect dominates the income effect” is correct.

Explanation:

If the real wage increases then the opportunity cost for leisure will also increase. Therefore, an increase in real wages and a rise in the opportunity cost of leisure induce labor to supply more workforce or labor force. This is known as the substitution effect. Moreover, when this substitution effect is greater than the income effect then the supply curve for labor is upward sloping.