As wages rise, the substitution effect induces households to
A) reduce the opportunity cost of leisure.
B) reduce the economic rent from leisure.
C) choose supplying labour in the labour market rather than engage in leisure.
D) choose leisure rather than supplying labour in the labour market.

Question

Quizplus · Accepted Answer

The substitution effect refers to the economic understanding that as wages increase, the opportunity cost of leisure increases as well. This means that each hour not worked is more costly in terms of forgone earnings. Therefore, households are more likely to substitute leisure with labor, choosing to work more hours to take advantage of the higher wages.

As Wages Rise, the Substitution Effect Induces Households to