What is the substitution effect of a wage increase? What is the income effect of a wage increase? Explain under what conditions the labor supply curve will be upward sloping and when it will be downward sloping

What will be an ideal response?

The substitution effect refers to the fact that an increase in wages raises the opportunity cost of leisure and causes workers to devote more time to working and less time to leisure activities. The income effect refers to the fact that an increase in wages increases workers' purchasing power and causes an increase in the quantity demanded of leisure, causing a reduction the quantity of labor supplied. The labor supply curve will be upward sloping when the substitution effect is greater than the income effect, so an increase in the real wage will increase the quantity of labor supplied, and will be downward sloping if the income effect is greater than the substitution effect, so an increase in the real wage will decrease the quantity of labor supplied.