Explain why, for the the labour supply curve to slope upwards, the substitution effect of a change in the wage must dominate the income effect.

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Bunny GreenfelderLv2

29 Sep 2019

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Question 1
a. Why are indifference curves convex to the origin? Explain what Marginal Rate of Substitution (MRS) means? When would indifference curves be linear, vertical or horizontal?
b. Explain the concepts of income effect and substitution effect? When would the individual labour supply curve bend backwards (explain using diagram)? What would be the shape of the labour supply curve if the income effect was always equal to the substitution effect (Explain using diagram)

greenox429

Demand curves can be upward sloping when the good in question is a) inferior with a large income effect b) normal with a large substitution effect c) inferior with a large substitution effect d) demand curves never slope upwards

The labour-supply curve slopes upward if:

a. Leisure is a normal good.

b. Consumption is a normal good.

c. The income effect on leisure is greater than the substitution effect.

d. The substitution effect on leisure is greater than the income effect.