usmig ayuot d. subsidizing production of the good by $5 per unit e. letting the

Question

usmig ayuot d. subsidizing production of the good by $5 per unit e. letting the private market operate freely 6. The figure given below shows a backward-bending labor supply curve for an individual. In the figure below, which c the following is true at a wage rate of $14? Exhibit 12.2 wage rate 20 Hours of 20 40 60 abor/week a. The income effect dominates the substitution effect. b. The substitution effect dominates the income effect c. No labor is supplied d·The income effect equals the substitution effect e. The supply curve is horizontal.

Explanation / Answer

The right answer is option a. The income effect dominates the substitution effect.

Explanation: Backward bending supply curve happens when higher wage results in the lower supply of labor hours. This is because when wage increases, people reach their target income by working less number of working hours because of the income effect.

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