What does it mean to say the labor supply is backwards bending? How does this relate to the direction and magnitude of the income and substitution effects? Will the labor supply be backwards bending if leisure is a normal good?
Will it be backwards bending if leisure is an inferior good?
Backwards bending means that as the wage rate increases, the amount of labor supplied may increase, but then decrease as the wage rises high enough. When leisure is a normal good, the income effect and substitution effect of a wage increase move in opposite directions. When the income effect dominates the substitution effect, the labor supply is backwards bending. If leisure is an inferior good, the two effects move together and the labor supply does not bend backwards.
You might also like to view...
Dumping occurs when a foreign monopolist charges ______ price in the domestic market than/as in a foreign market.
a. a lower b. a higher c. the same d. an equivalent
If an economy cannot produce more of one good without producing less of another good, this implies that which of the following has been achieved?
A) allocative efficiency B) minimum marginal cost C) PPF efficiency D) production efficiency E) maximum marginal benefit