Question

1\. According to the backward-bending supply curve, as the hourly wage rate increases from 0 to \(\$ 10,000\) the number of hours worked per week by the average person will (LO2) a) be constant b) decrease, then increase c) increase, then decrease d) increase steadily e) decrease steadily

Short answer

Based on the backward-bending supply curve, as the hourly wage rate increases from 0 to $10,000, the number of hours worked per week by the average person will initially increase and then decrease. This behavior is consistent with the characteristics of the backward-bending supply curve, as it captures the trade-off between labor and leisure time. The correct answer is (c) increase, then decrease.

Step-by-step solution

Understanding the Backward-bending Supply Curve

A backward-bending supply curve shows the response of hours worked by laborers to changes in their wage rates. Initially, when the wage rate is low, the supply curve has a positive slope - indicating that workers are willing to work more hours as their hourly wage increases. However, at some point, the curve starts to bend backward, meaning that the increase in the hourly wage leads to a decrease in the number of hours worked per week. This change happens because workers start to prioritize leisure time over additional income.

Analyzing Each Option

Let's examine each option: a) Be constant: This option suggests that the number of hours worked doesn't change with the wage rate, which doesn't follow the characteristics of the backward-bending supply curve. b) Decrease, then increase: According to the backward-bending supply curve, hours worked initially increase with the wage rate before decreasing. So, this option doesn't align with the curve dynamics. c) Increase, then decrease: This option is consistent with the backward-bending supply curve, as it indicates that hours worked initially rise with the wage rate but then fall after a certain point. d) Increase steadily: This option suggests that the number of hours worked per week always increases with the wage rate, but the backward-bending supply curve shows a decrease in hours worked after a certain point. e) Decrease steadily: This option indicates that hours worked per week always decrease as the wage rate increases, which also doesn't match the behavior of the backward-bending supply curve.

Selecting the Correct Option

Based on the analysis above, we can conclude that the correct answer is: c) Increase, then decrease

Key concepts

Labor Supply

The term 'labor supply' refers to the total hours that workers are willing and able to work at a given wage rate. It's essential to consider labor supply in economic discussions because it reflects the preferences and decisions of individuals concerning work and income. The relationship between labor supply and wage rates is typically illustrated by a labor supply curve, which plots wage rates against the number of hours worked.

As wage rates increase from a low level, workers are generally inclined to offer more labor (i.e., work more hours) because the opportunity cost of not working – the income foregone – is higher. Therefore, the labor supply curve is positively sloped at this point. However, as wages continue to increase beyond a certain threshold, the curve can bend backward. This presents a turning point where individuals start valuing their leisure time more than the additional income from labor, and thus, the number of hours they are willing to supply begins to decrease, even as wages rise.

This behavior showcases the labor-leisure tradeoff and is influenced by multiple factors such as income effect, substitution effect, and individual preferences.

Wage Rates

In economics, wage rates are the amount of compensation workers receive in exchange for their labor, typically expressed per hour, day, or piece of output. Wage rates are fundamental in determining an individual's standard of living and are a crucial factor in every working person's decision-making process.

When wage rates increase, workers initially respond by working more hours as they seek to take advantage of higher earnings – this is known as the substitution effect, where labor is 'substituted' for leisure because it's now more 'expensive' to take time off. However, once wages reach a high enough point, the income effect can outweigh the substitution effect: workers have earned enough income to satisfy their needs and begin to prioritize leisure over labor.

This dynamic relationship between wage rates and labor supply is essential for understanding labor market behaviors and for developing policies related to employment, minimum wage legislation, and taxation.

Leisure Versus Labor Tradeoff

The leisure versus labor tradeoff is a critical concept that helps explain individual working hours and labor supply decisions. It's a balancing act between time spent working (labor) and time spent not working (leisure). As wage rates change, individuals reassess their preferences for leisure and work.

When wages are low, the cost of leisure is also low, meaning a person isn't forgoing a significant amount of income by enjoying more leisure time. As wages increase, the cost of leisure becomes higher - individuals forgo a substantial amount of income when choosing leisure over work. However, at a certain point, further increases in wages provide enough income so that individuals reach or surpass their desired level of economic well-being and begin to value additional leisure time higher than additional work.

Employers and policymakers can benefit from understanding the leisure versus labor tradeoff to develop strategies that maximize productivity while respecting workers' preferences for leisure. Moreover, individual financial goals, cultural norms, and the availability of leisure activities also impact the tradeoff, showing a complex interplay between economic and social factors.