The Supply Curve Is Believed to Bend Backward at High

question 109

Multiple Choice

The supply curve is believed to bend backward at high wage rates because

• A)income effects outweigh substitution effects.
• B)substitution effects outweigh income effects.
• C)the income and substitution effects work together to create the backward bend.
• D)leisure time is less attractive.

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Definitions:

Capital Structure

The mix of debt and equity financing a company uses to fund its operations and growth.

M&M Proposition II

Modigliani and Miller's Proposition II states that a company's cost of equity increases as it increases its leverage due to the risk premium on equity.

Debt-Equity Ratio

A financial ratio that measures the relative proportion of shareholders' equity and debt used to finance a company's assets.

Financial Risk

The chance of incurring a loss in capital in an investment or business operation.