The red budget shown to the right is a compensated budget by which we compensate our consumer for the income effect of the wage increase. Removing the income effect leads our consumer to slightly increase labor supply, by two hours.

    If we look at the income effect alone our consumer purchases 7 more hours of leisure per week, for a net increase of 5 hours per week of leisure, or a net reduction of 5 hours per week of labor. This consumer is on the backward bending portion of her labor supply curve.


Copyright © 1995-2004 OnLineTexts.com, Inc. - All Rights Reserved