The substitution effect describes the
A) incentive to work more when the wage rises.
B) incentive to work less when the wage rises.
C) decision whether to work more or less.
D) decision whether to join the labor force.
E) incentive to change jobs.

Question

Quizplus · Accepted Answer

The substitution effect refers to the economic theory that as the price of a good or service rises, people will substitute it for a similar, less expensive product. In the case of labor, if the wage rate rises, workers will be incentivized to work more because they can earn more for their time. This is the substitution effect at work in the labor market.

The Substitution Effect Describes the