The substitution effect of a wage increase is observed when
A)the higher wage income causes workers to take more leisure and work less.
B)leisure's higher opportunity cost causes workers to take less leisure and work more.
C)the higher wage income causes workers to take more leisure and work more.
D)leisure's higher opportunity cost causes workers to take more leisure and work less.

Question

Quizplus · Accepted Answer

The substitution effect of a wage increase occurs when the higher wage makes leisure relatively more expensive (higher opportunity cost) compared to working, leading workers to take less leisure and work more. Therefore, option B is the correct answer. Option A and C are incorrect because they contradict the substitution effect. Option D is incorrect because it describes the income effect, which represents the increase in leisure due to higher income, making leisure more affordable.

The Substitution Effect of a Wage Increase Is Observed When