19 APPENDIX: Indifference Curve Analysis of Labor Supply

In the body of this chapter, we explained why the labor supply curve can slope downward instead of upward: the substitution effect of a higher wage rate, which provides an incentive to work longer hours, can be outweighed by the income effect of a higher wage rate, which may lead individuals to consume more leisure. In this appendix we show how this analysis can be carried out using the indifference curves introduced in the appendix to Chapter 10.