Question

Maude’s labor-supply curve slopes upward if, for Maude,

1. leisure is a normal good

2. consumption is a normal good

3. the income effect on leisure exceeds the substitution effect.

4. the substitution effect on leisure exceeds the income effect.

Short answer

The correct option is d) the substitution effect on leisure exceeds the income effect.

Step-by-step solution

Explaining the labor supply curve

The labor supply curve is upward when the income is low and downward sloping when the income is high. The labor supply curve is shown below:

At a low level of income, the substitution effect is more than the income effect; thus, the labor supply increases with a rise in income. Leisure becomes more costly, and a person prefers working more. This is the upward sloping phase of the labor supply curve.

When the income is very high, the income effect dominates the substitution effect. People find working as an inferior good and, hence, increase the consumption of normal good, enjoying more leisure activities. This is where the downward sloping phase of labor supply curve occurs.

Thus, a labor supply curve is upward sloping only when the substitution effect is greater than the income effect.