What is the substitution effect of a wage increase? What is the income effect of a wage increase? Under what conditions will a worker's labor supply curve become downward sloping?
What will be an ideal response?
The substitution effect refers to the fact that an increase in the wage raises the opportunity cost of leisure and causes a worker to devote more time to working and less time to leisure. The income effect of a wage increase refers to the fact that an increase in the wage increases a worker's purchasing power and causes an increase in the quantity demanded of all normal goods including leisure. Therefore, the income effect of a wage increase causes a worker to reduce the quantity of labor supplied. The labor supply curve becomes downward sloping if the income effect of a wage increase is greater than the substitution effect of the wage increase.
You might also like to view...
The acquisition of more than 10 percent of the shares of ownership in a company in another country is known as
A) net national investment. B) portfolio investment C) net exports. D) none of the above
Every luxury good is a normal good but not every normal good is a luxury.
Answer the following statement true (T) or false (F)
The total utility from three skirts is
A) three times the marginal utility of the third skirt. B) three times the price of a skirt. C) three skirts divided by total income. D) the sum of the marginal utility of the first skirt plus the marginal utility of the second skirt plus the marginal utility of the third skirt.
Since the U.S. economy expanded rapidly from 1992 to 2000, it must be true that
A. fiscal contraction overwhelmed monetary expansion. B. monetary expansion overwhelmed fiscal contraction. C. monetary expansion exactly offset fiscal contraction. D. monetary contraction overwhelmed fiscal expansion.