MICROECONOMICS Explain the labor-leisure tradeoff. Why would the labor supply be backward bending at a very...
MICROECONOMICS
- Explain the labor-leisure tradeoff. Why would the labor supply be backward bending at a very high wage rate?
Homework Answers
When wage rate increases then
it leads to an increase in opportunity cost of leisure which makes consumption of leisure to reduce (substitution effect)
it also leads to an increase in real income which leads to an increase in consumption of leisure(income effect)
Thus when income effect is greater than substitution effect then there is an increase in leisure and labor supply decreases. Thus when wage rate increases, labor supplied decreases leading a backward bending supply curve
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MICROECONOMICS
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