Question

a. In our model explaining the consumer's supply of labor, what determines the slope of the consumer's budget line? the values at which the budget line meets the horizontal and vertical axes? the sign of the slope of the consumer's labor supply curve?

b. Is it possible for the labor supply curve to be negatively sloped? Why or why not?

Answer 1

a. In the model explaining the consumer's supply of labor, the given wage rate determines the slope of the consumer's budget line .The values at which the budget line meets the horizontal and vertical axes is at 24 hours per day i.e., T. The sign of the slope of the consumer's labor supply curve states the nature of the consumer's preferences.

b. It depends on the income effect and substitution effect. As the wage increases, the cost of leisure also increases and for the higher wages, the consumer work for longer hours. This is called as substitution effect. Whereas in the income effect, when the wage increases, the consumer will choose to work less if he/ she is satisfied with the level of income they have. This is called as income effect. If the income effect is greater than the substitution effect, then the labor supply curve may negatively sloped.