According to the theory of the backward-bending labor supply curve, ( \(\mathrm{LO2})\) a) first the substitution effect sets in, then the income effect b) first the income effect sets in, then the substitution effect c) the substitution effect and the income effect set in at the same time d) there is neither a substitution effect nor an income effect

Short Answer

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The correct answer is a) first the substitution effect sets in, then the income effect. This accurately describes the relationship between the substitution effect, the income effect, and the backward-bending labor supply curve. Initially, as wage rates increase, the substitution effect dominates, leading to an increase in labor supplied. However, as wages continue to rise, the income effect starts to outweigh the substitution effect, causing a decrease in labor supplied.

Step by step solution

01

Understand the Backward-Bending Labor Supply Curve

The backward-bending labor supply curve is a graphical representation of the relationship between the wage rate and the quantity of labor supplied by individuals in a market. As the wage rate increases, the labor supply typically increases due to higher opportunity cost of leisure (substitution effect). However, at some point, further increases in the wage rate will lead to a decrease in the labor supply, as the income effect begins to outweigh the substitution effect. This is because individuals will choose leisure over additional work hours as they have already earned enough income to meet their needs. Now let's evaluate each of the given statements:
02

Statement A: First the substitution effect sets in, then the income effect

Statement A correctly explains the order of the effects in a backward-bending labor supply curve. As wage rates increase, initially the substitution effect dominates, leading to an increase in labor supply. However, as wages continue to rise, the income effect becomes more prominent and starts to outweigh the substitution effect, leading to a decrease in the labor supply.
03

Statement B: First the income effect sets in, then the substitution effect

Statement B is incorrect because it reverses the order of the effects. As explained earlier, the substitution effect sets in first, causing an initial increase in labor supply as the wage rate increases, followed by the income effect.
04

Statement C: The substitution effect and the income effect set in at the same time

Statement C is not accurate because, although both effects are present, they do not set in simultaneously. The substitution effect is dominant initially, but as wage rates continue to increase, the income effect starts to outweigh the substitution effect.
05

Statement D: There is neither a substitution effect nor an income effect

Statement D is incorrect because both the substitution effect and the income effect play significant roles in shaping the backward-bending labor supply curve. The curve's shape is a direct result of the interaction between these two effects. To conclude, the correct statement that accurately describes the relationship between the substitution effect, the income effect, and the backward-bending labor supply curve is: a) first the substitution effect sets in, then the income effect.

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Most popular questions from this chapter

The possibility of carning economic rent is great if (LO5) a) the supply of a factor is very high relative to demand b) the demand for a factor is very high relative to supply c) both demand for a factor and supply of a factor are high d) both demand for a factor and supply of a factor are low

Which statement is the most accurate? (L.O7) a) The federal minimum wage rate is indexed to the rate of inflation: Each year it's raised equal to the rate of inflation during the previous year. b) Over 10 million Americans are covered by a living wage law. c) There is considerable disagreement as to whether the federal minimum wage helps the unskilled workers more than it hurts them. d) Very few people's wage rates are actually determined by supply and demand.

Which statement is true about incomes in the United States? (LO8, 9) a) Almost everyone earns about the same income. b) Almost everyone is either very rich or very poor. c) There is a wide disparity in income. d) None of these statements is true.

According to the backward-bending supply curve, as the hourly wage rate increases from 0 to \(\$ 10,000\) the number of hours worked per week by the average person will \((1.02)\) a) be constant b) decrease, then increase c) increase, then decrease d) increase steadily e) decrease steadily

If the minimum wage were eliminated, the employment of marginal workers would (LO7) a) rise a lot b) rise a little c) stay exactly the same d) fall a little c) fall a lot f) fall by an indeterminate amount g) rise by an indeterminate amount

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