play golf, and try out for a major league baseball team. Under what circumstances will a labor supply curve bend backwards? Show this result in a labor-leisure choice diagram. Is leisure normal, inferior, or neither when the labor supply curve bends backward as the wage rate rises? Please identify the income and substitution effects of a reduction in work hours at higher pay.
In case of labor supply, when the money income of the laborers increases the supply of labor falls. Leisure is probably a normal good for most of the people. When money income rises, people choose to consume more leisure.
Divide the whole day(24hours) in two parts: hours of labor and hours of leisure.
We assume, H=24-L; where, H is the total leisure hour & L is the total labor hour.
In case of labor supply, when the money income of the laborers increases the supply of labor falls. Leisure is probably a normal good for most of the people. When money income rises, people choose to consume more leisure.
When the wage rate increases there are two effects: the return to working more increases and the cost of consuming leisure increases.
Here comes the idea of Income and substitution effect.
The backward-bending portion of the labor supply curve arises when the income effect of the higher wage (which encourages more leisure) is greater than the substitution effect (which encourages more work).
In the diagram are the two levels of leisure hour; are the two levels of wages.
As the wage rate increases initially the labors supply more labor and consume less leisure. After a certain level of higher wage, they start enjoying more leisure and supplying less labor.
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