In terms of labor supply,the substitution effect of a higher wage causes a(n):
A)increase in leisure time.
B)increase in the quantity of labor supplied.
C)substitution of leisure for work.
D)reduction of work time to zero.

Question

Quizplus · Accepted Answer

The substitution effect of a higher wage means that workers are more likely to choose to work more since the opportunity cost of not working (i.e. the foregone wage) has increased. This leads to an increase in the quantity of labor supplied. Option A is incorrect because a higher wage actually incentivizes workers to work more and potentially sacrifice leisure time. Option C is partially correct in that workers may choose to substitute some leisure time for work, but the primary effect is an increase in the quantity of labor supplied. Option D is not applicable as it assumes a reduction to zero which is unrealistic.

In Terms of Labor Supply,the Substitution Effect of a Higher