Final answer:
The statement is true: increased wages cause both a substitution effect that might increase labor supply and an income effect that might decrease it. The real change in labor supply is determined by which effect is stronger.
Step-by-step explanation:
The statement is true: if an individual's wage rate increases, the substitution effect will generally lead the individual to supply more labor hours due to the higher opportunity cost of leisure, while the income effect may lead the individual to work fewer hours because they can maintain their desired standard of living with less work. The overall impact on labor supply depends on the relative strength of these two effects.
In the context of a labor-leisure choice, a wage change influences labor supply through these two mechanisms. The substitution effect occurs because when wages increase, the opportunity cost of leisure also increases, meaning leisure becomes relatively more expensive. As a result, individuals might choose to work more to take advantage of their higher earning potential. Conversely, the income effect results from the increased purchasing power due to the wage increase, allowing individuals to afford the same standard of living with fewer hours worked, potentially leading them to value additional leisure time over income.
The actual response to changes in the real wage is a balance between these effects. When the substitution effect outweighs the income effect, the labor supply curve has a typical upward slope. If the income effect is stronger, the curve might slope downwards, implying individuals will supply less labor despite the wage increase.