The substitution effect of a decrease in the wage rate would lead most people to
A)supply less labor and demand less leisure.
B)supply less labor and demand more leisure.
C)supply more labor and demand less leisure.
D)supply more labor and demand more leisure.

Question

Quizplus · Accepted Answer

The substitution effect suggests that as wages decrease, leisure becomes relatively more expensive and work becomes relatively less expensive. Hence, people would prefer to work less (supply less labor) and enjoy more leisure time (demand more leisure).

The Substitution Effect of a Decrease in the Wage Rate