With reference to the supply of labour by an individual, consider the following statements: 1. An increase in wage rate always leads to an increase in the supply of labour hours by an individual. 2. At high wage rates, the income effect may dominate the substitution effect, leading to a decrease in labour supply. 3. The individual labour supply curve can be backward bending. Which of the statements given above is/are correct?

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).

With reference to the supply of labour… - NCERT Class 12 Economics MCQ

NCERT Class 12 Economics — Chapter 2: Market Equilibrium

mcqhard

With reference to the supply of labour by an individual, consider the following statements:

An increase in wage rate always leads to an increase in the supply of labour hours by an individual.
At high wage rates, the income effect may dominate the substitution effect, leading to a decrease in labour supply.
The individual labour supply curve can be backward bending.

Which of the statements given above is/are correct?

NCERT textbook question

From NCERT Introductory Microeconomics · Page 76

Options

A1 and 2 only
B2 only
C1, 2 and 3
D2 and 3 only

Did you get this right?

Solution

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).

Your note

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What is the primary consequence of a price ceiling accompanied by rationing?

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In a perfectly competitive market, if the market price is above the equilibrium price, there will be:

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