Question

Which of the following statements is true? The slope of the labor supply curve depends only on the substitution effect of a wage rate change. The slope of the labor supply curve depends only on the income effect of a wage rate change. The income effect and the substitution effect of a wage rate change work in the same direction. The income effect and the substitution effect of a wage rate change work in opposite directions.

Answer 1

The income effect and the substitution effect of a wage rate change work in opposite directions.

Step-by-step explanation:

The substitution effect refers to the change in consumption patterns as a result of change in relative income and prices of goods. For example, Coca-Cola vs Pepsi, chicken vs beef etc.

The income effect refers to the change in consumption patterns as a result of change in the purchasing power of an individual. For example, a decrease in all product's prices means you can buy a cheaper product for the same price.

Thus, the only correct statement is that the income effect and the substitution effect of a wage rate change work in opposite directions.