The substitution effect is:

Question

Quizplus · Accepted Answer

The substitution effect refers to the change in desired work hours due to a change in the wage rate, holding real income or utility constant. It is distinct from the income effect, which measures the change in desired work hours due to a change in real income, holding the wage rate constant. So, option C correctly defines the substitution effect. Option A is incorrect because it refers to the concept of income-maximizing leisure, which is not the same as substitution effect. Option B is partly correct as it refers to the total change in desired work hours due to changes in income and wage, but it does not hold utility constant. Option D is incorrect because the substitution effect and income effect can be of equal or varying magnitudes, depending on the relative income and substitution elasticities of labor supply.

The Substitution Effect Is