The substitution effect from a change in wages is
A)when people switch to higher paying jobs.
B)when people work less as their income increases.
C)when companies use more capital or other inputs as wages increase and more labor when wages decrease.
D)when people have an incentive to work more when wages increase and less when they decrease.

Question

Quizplus · Accepted Answer

The substitution effect refers to the change in an individual's labor supply resulting from a change in the wage rate. When wages increase, individuals are incentivized to work more because the opportunity cost of not working (i.e., the income foregone by enjoying leisure time) becomes higher. Conversely, when wages decrease, the incentive to work lessens because the opportunity cost of leisure is lower. This effect is purely based on the trade-off between labor and leisure as wage rates change.

The Substitution Effect from a Change in Wages Is