Question

Suppose the wage decreases. What effect will this have on a worker's labor supply? The substitution effect of a wage decrease causes the worker to supply (a larger/ the same/ a smaller) quantity of labor. The income effect of a wage decrease causes the worker to supply (the same/ a larger/ a smaller) quantity of labor. If the substitution effect is bigger than the income effect, then the supply curve will slope ( upward/ downward) .

Answer 1

The correct answer is: a smaller; a larger; upward.

Step-by-step explanation:

In case there is a decrease in the wage rate, the workers would prefer leisure over work. The substitution effect of decline in wages would cause the supply of labor to decline.

The income effect has the reverse impact. With decline in wages, the income of the workers is reduced. In order to compensate this decline in income, workers will work more so that they earn more. Thus, the income effect will lead to an increase in the supply of labor.

If the substitution effect is dominant over the income effect, this means that more labor will be supplied at higher wages and vice versa. So, the labor supply curve will be upward sloping.