Lorenzo accepts his employer's offer of the opportunity to work overtime at a substantial increase in wages. This is an example of the _____ effect on the labor supply.

Question

Quizplus · Accepted Answer

The substitution effect occurs when changes in relative wages or prices cause a worker to substitute one activity for another. In this case, Lorenzo is substituting leisure time for work because the increased wages make working overtime more attractive compared to leisure.

Lorenzo Accepts His Employer's Offer of the Opportunity to Work