tut8 memo - Tut 8 Question 1: Labour Supply The only thing...

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Unformatted text preview: Tut 8 Question 1: Labour Supply The only thing that it is important that students illustrate is that rising wages may initially lead to increased supply of labour, but beyond some threshold wage, a rising hourly rate may actually lead to a decline in the number of hours supplied. Note that the graph above measures leisure hours, and students should illustrate the number of hours of labour supplied, not just leisure hours enjoyed as the question asked about labour supply. I didn't specify which graph should be provided, so mark the graph above or a backward bending labour supply graph as correct, as long as students explain (with reference to both graphs): The upward sloping section of the labour supply curve comes about because the substitution effect (the cost of leisure is rising) dominates the income effect (increased consumption of leisure due to a rise in real income), whereas the downward sloping section of labour supply curve comes about because the substitution effect (the cost of leisure rising) is dominated by the...
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tut8 memo - Tut 8 Question 1: Labour Supply The only thing...

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