Which of the following statements is true?
A)As the wage rate rises, the substitution effect decreases the opportunity cost of leisure and causes a worker to devote more time to working and less time to leisure.
B)As the wage rate rises, the substitution effect increases the opportunity cost of leisure and causes a worker to devote more time to working and less time to leisure.
C)As the wage rate rises, the income effect increases the opportunity cost of leisure and causes a worker to devote more time to working and less time to leisure.
D)As the wage rate rises, the income effect causes a worker to devote more time to work and less time to leisure.

Question

Quizplus · Accepted Answer

The substitution effect occurs when the wage rate increases, causing the opportunity cost of leisure to increase. As a result, a worker will substitute leisure time for work time because the wage increase makes leisure time more expensive in terms of foregone wages. Therefore, statement B is true. Statement A is incorrect because the substitution effect increases the opportunity cost of leisure. Statement C is incorrect because the income effect does not affect the opportunity cost of leisure. Statement D is incorrect because it only describes the income effect without considering the substitution effect.

Which of the Following Statements Is True