What is the substitution effect of a wage increase? What is the income effect of a wage increase? Under what conditions will a worker's labor supply curve become downward sloping?
What will be an ideal response?
The substitution effect refers to the fact that an increase in the wage raises the opportunity cost of leisure and causes a worker to devote more time to working and less time to leisure. The income effect of a wage increase refers to the fact that an increase in the wage increases a worker's purchasing power and causes an increase in the quantity demanded of all normal goods including leisure. Therefore, the income effect of a wage increase causes a worker to reduce the quantity of labor supplied. The labor supply curve becomes downward sloping if the income effect of a wage increase is greater than the substitution effect of the wage increase.
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Gulmirah, a small underdeveloped country, has an adult population of 16.8 million, and the remaining 13.75 million of the population is below 18 years of age. The approximate output per capita of this country is $644.80 . The GDP of Gulmirah is equal to approximately _____
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