Consider the following statements about the individual labour supply curve:
(A) At low wage rates, the opportunity-cost effect of a wage rise dominates, so the individual supplies more labour.
(B) The individual labour supply curve slopes upward at all wage rates.
(C) At high wage rates, the purchasing-power effect of a wage rise dominates, so the individual supplies less labour.
(D) Beyond a certain wage rate, a rise in the wage reduces the labour supplied by the individual.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (A), (C) and (D) only
(A) At low wage rates, the opportunity-cost effect of a wage rise dominates, so the individual supplies more labour. — Correct. At low wages, the rise in the opportunity cost of leisure is the stronger effect, so the person works more.
(B) The individual labour supply curve slopes upward at all wage rates. — Incorrect. The curve slopes upward only up to a certain wage. Beyond it, the curve bends backward.
(C) At high wage rates, the purchasing-power effect of a wage rise dominates, so the individual supplies less labour. — Correct. At high wages, the rise in purchasing power is the stronger effect. The person wants more leisure, so she works less.
(D) Beyond a certain wage rate, a rise in the wage reduces the labour supplied by the individual. — Correct. This is the backward bending part of the individual labour supply curve.
NCERT (2026-27): “Wage Determination in Labour Market … This increase in wage rate will have two effects: First, due to the increase in wage rate, the opportunity cost of leisure increases which makes leisure costlier. Therefore, the individual will want to enjoy less leisure. As a result, they will work for longer hours. Second, because of the increase in wage rate to w2, the purchasing power of the individual increases. So, she would want to spend more on leisure activities. The final effect of the increase in wage rate will depend on which of the two effects predominates. At low wage rates, the first effect dominates the second and so the individual will be willing to supply more labour with an increase in wage rate. But at high wage rates, the second effect dominates the first and the individual will be willing to supply less labour for every increase in wage rate. Thus, we get a backward bending individual labour supply curve which shows that up to a certain wage rate for every increase in wage rate, there is an increased supply of labour. Beyond this wage rate for every increase in wage rate, labour supply will decrease.” |