If the wage rate increases, the substitution effect is for a person to work less and the income effect is for a person to take less leisure.

Question

Quizplus · Accepted Answer

The substitution effect for a higher wage rate is for a person to work more because the opportunity cost of leisure time has now increased. The income effect for a higher wage rate is for a person to have more income and potentially choose to work less because they can afford to do so.

If the Wage Rate Increases, the Substitution Effect Is for a Person