Reducing Long-Run Labor Usage

The following questions refer to the accompanying diagram, which shows a firm reducing its long-run labor usage from L0 to L1 in response to an increase in the wage rate.

-Refer to Reducing Long-Run Labor Usage.The substitution effect of the wage change is the movement from point X to

Question

Reducing Long-Run Labor Usage

The following questions refer to the accompanying diagram, which shows a firm reducing its long-run labor usage from L0 to L1 in response to an increase in the wage rate.

-Refer to Reducing Long-Run Labor Usage.The substitution effect of the wage change is the movement from point X to

Quizplus · Accepted Answer

The substitution effect of the wage change is the movement along the same indifference curve to a new point on the new budget constraint. In this case, the movement is from point X to point B, as the wage change has made leisure relatively more expensive and work relatively more attractive. Therefore, individuals will choose to work more hours and reduce their leisure time. Points A, C, and D are not relevant to the substitution effect of the wage change.