The substitution effect of a higher wage measures

Question

Quizplus · Accepted Answer

The substitution effect refers to how people respond to a change in relative prices. In the case of a higher wage, individuals may opt to work more hours because the opportunity cost of leisure time has increased. Alternatively, they may choose to work in a different occupation that pays a higher wage. This response is driven by the relative prices (or wages) of different options, indicating that the substitution effect measures how people trade-off between different choices based on the opportunity cost of their time and labor. Therefore, option D is the correct answer.

The Substitution Effect of a Higher Wage Measures