The substitution effect of a decrease in the wage will:
A) decrease leisure, regardless of whether leisure is a normal or inferior good.
B) increase leisure, regardless of whether leisure is a normal or inferior good.
C) increase leisure only if leisure is a normal good.
D) decrease leisure only if leisure is a normal good.

Question

Quizplus · Accepted Answer

The substitution effect of a decrease in wages will decrease the opportunity cost of leisure and increase the incentive to work. Therefore, individuals will substitute leisure with work and increase the supply of labor. This effect is irrespective of whether leisure is a normal or inferior good. Thus, option B is the correct answer.

The Substitution Effect of a Decrease in the Wage Will