If Chad's labor-supply curve is upward-sloping, then, for Chad,
A)an increase in the wage creates an income effect that is greater than the substitution effect.
B)an increase in the wage creates a substitution effect that is greater than the income effect.
C)leisure and consumption are perfect substitutes.
D)leisure and consumption are perfect complements.

Question

Quizplus · Accepted Answer

An upward-sloping labor-supply curve means that as the wage rate increases, the individual is willing to supply more labor because the opportunity cost of leisure time increases. This is a substitution effect. The income effect is the effect of the increased wage rate on the individual's purchasing power. Since leisure is a normal good, the income effect leads to an increase in leisure time. However, the substitution effect dominates for Chad, so the overall effect is an increase in labor supply as the wage rate increases. Therefore, B is the correct answer.

If Chad's Labor-Supply Curve Is Upward-Sloping, Then, for Chad