Question

With regard to the supply of labour:

a) Explain how the leisure preference analysis is used to establish the relationship between real income and supply of labor.

b) Discuss the significance of the backward bending supply curve of labour for economic analysis.

Answer 1

a)

Leisure preference analysis shows that how does rise in income lead to change in preference of workers towards the work and leisure.

At the lower level of income, workers tend to work more to increase their real incomes. But gradually, when real income of workers rise, now they start prefering leisure over the work.

b)

Backward bending supply curve can be used by the government for making different types of policies. If government finds that labor supply curve is backward bending, then it may increase tax rate. Since tax rate will not affect the incentive to work. On other hand, if labor supply curve is not backward bending, then increase in tax rate may lead to fall in the motivation or incentives to work.