Correct Option
The correct option is 2 and 3 only.
Explanation
The supply of labour by an individual is determined by the trade-off between work (income) and leisure. Changes in the wage rate trigger two opposing economic forces: the substitution effect and the income effect. The interaction between these two effects determines the slope and shape of the individual labour supply curve.
Statement-wise Analysis
- Statement 1 is Incorrect. An increase in the wage rate does not always lead to an increase in the supply of labour hours. While higher wages typically incentivize more work initially, at very high wage levels, individuals may prefer to work less and enjoy more leisure time because their income targets are met with fewer hours.
- Statement 2 is Correct.
- The Substitution Effect suggests that as wages rise, the opportunity cost of leisure increases, prompting the individual to substitute leisure with work (increasing labour supply).
- The Income Effect suggests that as wages rise, the individual becomes wealthier and demands more "normal goods," including leisure (decreasing labour supply).
- At sufficiently high wage rates, the Income Effect often dominates the Substitution Effect, leading to a reduction in labour supply.
- Statement 3 is Correct. As a direct result of the income effect dominating the substitution effect at high wage levels, the graphical representation of labour supply bends back towards the left (lower quantity of labour). This is technically termed the backward-bending supply curve of labour.
Key Takeaway: The individual labour supply curve can be backward-bending because, at high wage levels, the income effect (preference for leisure due to increased wealth) outweighs the substitution effect (incentive to work due to higher returns).