Chapter 19A, Problem 4P

To determine

Income and Substitution effect & Individual labor supply curve.

Concept determination:

Income effect is the effect an individual’s income has on the quantity of goods or services demanded. Any increase or decrease in consumers income results in an equivalent increase or decrease in the purchasing power of consumers.

Substitution effect on the other hand is an effect wherein a rise in price induces the consumer to switch to goods which are relatively low priced. If there is an increase in consumer’s income, he will prefer buying goods which are higher priced to maintain his standard of living.

An individual labor supply curve is a backward bending supply curve which assumes that when the wages increase beyond a certain level, people will substitute leisure over the extra time they put for work. Thus higher wages will lead to a decrease in the labor time offered.