Question

(b) Suppose that an individual earns an income of $280. If there is an income maintenance program where the income guarantee is $300 and the benefit reduction rate is 60. What is their level of subsidy?

Answer:

(c) What is the basis for the backward-bending shape of the labor supply curve and how have neoclassical economists sought to integrate income and substitution effects into the labor supply curve?

Answer:

Answer 1

Background bending supply curve of Labour

In economics Background bending supply curve of Labour is a graphical device showing situation n which has real wages increases beyond a certain level, people will substitute leisure for paid worktime and so higher wages lead to a decrease in the Labour supply  and so less labour-time being offered for sale.

The "labour-leisure" tradeoff is the tradeoff faced by wage-earning human beings between the amount of time spent engaged in wage-paying work and satisfaction-generating unpaid time, which allows participation in "leisure" activities and the use of time to do necessary self-maintenance, such as sleep. The key to the tradeoff is a comparison between the wage received from each hour of working and the amount of satisfaction generated by the use of unpaid time.

Such a comparison generally means that a higher wage entices people to spend more time working for pay; the substitution effect  implies a positively sloped labour supply curve. However, the backward-bending labour supply curve occurs when an even higher wage actually entices people to work less and consume more leisure or unpaid time.

Substitution and income effect have with the supply curve Labour

If the substitution efforts uus strong than income effect then the Labour supply slopes upwards If, beyond a certain wage rate, the income effect is stronger than the substitution efforts then the Labour supply curve bends backward.

Shape for Labour supply

A look at factors that determine an individuals supply of Labour and the market supply of Labour . Higher wages usually will encourage a worker to supply more Labour because work is more attractive compared to leisure. Therefore the supply curve for Labour tends to be upwardly sloping.