As the wage rate rises, what happens to the quantity of labor an individual supp
ID: 1219011 • Letter: A
Question
As the wage rate rises, what happens to the quantity of labor an individual supplies? (4 points).
It increases at all wage rates.
It initially increases at low wage rates and then decreases at high wage rates.
It decreases at all wage rates.
It initially decreases at low wage rates and then increases at high wage rates.
a.It increases at all wage rates.
b.It initially increases at low wage rates and then decreases at high wage rates.
c.It decreases at all wage rates.
d.It initially decreases at low wage rates and then increases at high wage rates.
Explanation / Answer
Option B.
In this question we have to consider both the income and substitution effect of the change in the wage rate. Initially with the increase in the wage rate, substitution effect will overpower the income effect and leisure will decline and quantity of labor supplied will increase. But as the wage rate keep on increasing, the income effect will over power substitution effect and the laborer will supply less labor and enjoy more leisure as he earns more income for every hour he works now.
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