With a rise in real pay (W) up to a certain wage point after that, the labor supply curve began to bend backward, indicating that the income impact (IE) exceeds the substitution effect (SE).
With a rise in real pay (W) up to a certain wage point after that, the labor supply curve began to bend backward, indicating that the income impact (IE) exceeds the substitution effect (SE).
Because more people chose to work during the pay rate hike than engage in leisure activities, there will be more labor available.
Institutions will set limits on this supply and adhere to the wage, which will lead the supply to start declining as a result of the abundance in supply that this excessive supply will produce.
Due to backward bending, an excessive supply will restrict supply at the point between w1 and w2, and from that point onward at w3.
Therefore, the correct answer is option b. the substitution effect.
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