The diagram below shows an individual's supply of labour curve (SLS_LSL) for a specialized freelance consultant.
Which of the following statements correctly explains why the individual's hours of work fall from H1 H_1\,H1 to H2 H_2\,H2 when the wage rate rises from W1 W_1\,W1 to W2W_2W2?
The substitution effect, which encourages the worker to work more hours because the opportunity cost of leisure has risen, is outweighed by the income effect, which encourages the worker to work fewer hours because their higher real income increases their demand for leisure.
The substitution effect, which encourages the worker to work fewer hours because work has become less attractive, is outweighed by the income effect, which encourages the worker to work more hours as their target income increases.
The income effect, which encourages the worker to work more hours because leisure is an inferior good, is exactly equal to the substitution effect, causing a net contraction in the supply of labour.
The substitution effect, which increases the demand for leisure because leisure is now relatively cheaper, is reinforced by the income effect, which increases the demand for work to maximize savings.
