The relationship between the quantity of labor supplied and the real wage will be positive if:

Question

BlackTom AI · Accepted Answer

First, restating the question and all answer choices helps frame what we’re evaluating:
Question: The relationship between the quantity of labor supplied and the real wage will be positive if:
Options:
1) The income effect of a change in real wage dominates the substitution effect.
2) The substitution effect of a change in real wage dominates the income effect.
3) The substitution effect of a change in real wage is equal to the income effect.
4) The substitution effect of a change in real wage is zero.

Now, let’s analyze each option in turn with the underlying economic intuition about labor supply and real wage changes.
Option 1: The income effect dominates the substitution effect. In this scenario, a higher real wage would enable a consumer to afford more leisure, so the income effect tends to reduce labor supply. Since the income effect pulls in the opposite direction to the wage increase, the overall relationship between labor supplied and real wage would be negative or ambiguous, not clearly positive. This makes the statement implausible as a general condition for a positive relationship.
Option 2: The substitution effect dominates the income effect. Here, a higher real wage makes working relatively more attractive compared to leisure, incentivizing more hours of work. If the substitution effect is stronger than the income effect, the quantity of labor supplied rises with the real wage, yielding a positive relationship. This aligns with standard labor-supply theory where the wage rise encourages more work via the higher marginal benefit of working.
Option 3: The substitution effect equals the income effect. If these two forces exactly offset each other, the net effect on labor supply would be zero or indeterminate, not strictly positive. This would imply no clear positive relationship between labor supplied and the real wage, contradicting the condition asked for a positive relationship.
Option 4: The substitution effect is zero. If the substitution effect were zero, a change in the real wage would affect labor supply only through the income effect. Depending on whether income effects dominate, the direction could be negative or positive, but with no substitution effect to promote more work as wages rise, the standard positive relationship is not guaranteed. This makes this option inconsistent with a robust positive relationship.

In summary, the core idea is that a higher real wage tends to encourage more work due to the substitution effect (worth more to work than to leisure) while the income effect could reduce work by allowing more leisure with higher income. The condition for a positive relationship is when the substitution effect dominates the income effect, leading to more labor supplied as the real wage rises.

ECN 001B C01-C06 WQ 2025 Midterm Examination 1 (Winter 2025)

The relationship between the quantity of labor supplied and the real wage will be positive if:

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ECN 001B C01-C06 WQ 2025 Midterm Examination 1 (Winter 2025)

The relationship between the quantity of labor supplied and the real wage will be positive if:

View Explanation

Log in for full answers

Similar Questions

Sarah usually buys 5 cups of coffee and 2 muffins every day. The price of coffee falls significantly. Explain how the substitution effect and the income effect influence Sarah’s decision to buy more coffee.

For Sarah, meals at McDonald’s are an inferior good. When the price of meals at McDonald’s increases, Sarah buys less McDonald’s meals. This means that:

If a good is normal and its price increases,

Which of the following occurs simultaneously with an income effect?

Rose is allocating her budget between two goods—Apples and Bananas; both are normal goods. If the price of apples increases from $1 per pound to $2 per pound, then the income effect causes her to buy ___of apples and the substitution effect causes her to buy___ of apples.

The effect of a change in relative price on consumer choice can be divided into:

Which of the following occurs simultaneously with an income effect?

Assume that a consumer has well-behaved preferences. Following a price increase for good 1, we observe that a consumer increases the quantity demanded for good 1. From this, we know that

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

Rose is allocating her budget between two goods—Apples and Bananas; both are normal goods. If the price of apples increases from $1 per pound to $2 per pound, then the income effect causes her to buy _of apples and the substitution effect causes her to buy_ of apples.