Question

Based on PS behavior, we know that increase in u will cause

A. increase in real wage
B. no change in real wage
C. reduction in real wage
D. upward shift of PS curve

Answer 1

An increase in the real wage can have two effects on the labor supply decision: the substitution effect and the income effect.

Step-by-step explanation:

An increase in the real wage can have two effects on the labor supply decision: the substitution effect and the income effect. The substitution effect suggests that as the real wage increases, leisure becomes relatively more expensive, leading individuals to work more and consume less leisure. On the other hand, the income effect predicts that as the real wage increases, individuals will become richer and may choose to work less and enjoy more leisure. The overall impact of an increase in the real wage on the labor supply is uncertain, as it depends on the relative strength of these two effects.