Question

The supply curve in the labor market is upward-sloping if:

a. the substitution effect of a tax change dominates the income effect.
b. the income effect of a tax change dominates the substitution effect.
c. the income and substitution effects of a tax change exactly offset each other.
d. a tax change has only a substitution effect and no income effect.

Answer 1

The labor supply curve is upward-sloping if the substitution effect of higher wages dominates the income effect, leading workers to provide more labor and forgo leisure. (option a)

Step-by-step explanation:

The supply curve in the labor market is upward-sloping if the substitution effect of a tax change dominates the income effect. This is because the supply of labor adheres to the law of supply, implying that higher real wages will lead to a greater quantity of labor supplied. The substitution effect reflects the idea that as wages increase, labor becomes relatively more attractive compared to leisure, leading workers to substitute labor for leisure. On the other hand, the income effect suggests that when individuals earn more, they may prefer to work less and enjoy more leisure, given that they can maintain the same standard of living with less work. If the substitution effect is larger, workers will choose more labor hours to take advantage of the higher wage rates, thereby creating an upward-sloping labor supply curve.