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Figure: The Time Allocation Budget Line
-If an individual's labour supply curve is upward-sloping at low wage rates and downward-sloping at high wage rates,then at higher wage rates:
A) there is no substitution effect as wages change.
B) there is no income effect as wages change.
C) the income effect dominates the substitution effect.
D) the substitution effect dominates the income effect.

Question

Use the following to answer questions :
Figure: The Time Allocation Budget Line 
-If an individual's labour supply curve is upward-sloping at low wage rates and downward-sloping at high wage rates,then at higher wage rates:
A) there is no substitution effect as wages change. 
B) there is no income effect as wages change. 
C) the income effect dominates the substitution effect. 
D) the substitution effect dominates the income effect.

Quizplus · Accepted Answer

When the labour supply curve is upward-sloping at low wage rates and downward-sloping at high wage rates, it implies that the income effect dominates the substitution effect at higher wage rates. At higher wages, the individual will tend to work more hours for income maximization as the increase in wage rate increases the overall income earned. As a result, the income effect dominates the substitution effect.

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