5. The wage rate is the opportunity cost of an individual's time. It can be thought of as the price of leisure, since enjoying leisure means giving up income earning activities. Whenever wages increase consumers experience both an income effect and a substitution effect. Rising wages mean increasing income and since leisure is a normal good this income effect leads the consumer to purchase more leisure. The substitution effect (substituting away from increasingly expensive leisure toward relatively less expensive consumption) leads the consumer to work more as wages rise.

   A backward bending labor supply curve has both a positively and negatively sloped portion. At a wage rate below W* the substitution effect dominates so that our consumer chooses to work more as wages rise. Once her wage reaches W* the income effect dominates and she chooses to purchase more leisure and she begins to work less as wages rise.

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