Question

g Suppose that the labor supply curve has the standard shape in that it continuously slopes upward. This implies that throughout the curve: a. there is no substitution effect b. the income effect is stronger than the substitution effect c. the substitution effect is stronger than the income effect d. there is no income effect

Answer 1

c. the substitution effect is stronger than the income effect

Explanation:

When the labor supply curve has a continuously upward slope it means that the substitution effect is higher than the income effect. The substitution effect means that labor suppliers (households) will consider higher wages more attractive than other activities not related to work, e.g. leisure activities.

The income effect means that as the employees' total wages increase due to higher rates, they will work less and engage in more leisure activities. Since employees earn enough money to satisfy their needs, they are not motivated to work more hours.