In response to an increase in the wage rate,the substitution effect will cause a person to
A) supply fewer hours of labor.
B) supply more hours of labor.
C) supply the same hours of labor.
D) have a backward bend in her labor supply curve.

Question

Quizplus · Accepted Answer

The substitution effect refers to the change in consumption patterns due to a change in the relative prices of goods or services. When the wage rate increases, the price of leisure (which is the opportunity cost of working more hours) also increases. As a result, individuals are incentivized to substitute leisure with labor, meaning they are likely to work more hours to take advantage of the higher wage rate. This is why the substitution effect will cause a person to supply more hours of labor.

In Response to an Increase in the Wage Rate,the Substitution