The substitution effect of higher wages suggests that as the wage rate increases ?
Correct answer: C. leisure becomes more expensive and households buy less of it
- A. leisure becomes less expensive and households buy more of it
- B. leisure becomes more expensive and households buy more of it
- C. leisure becomes more expensive and households buy less of it
- D. leisure becomes less expensive and households buy less of it.
Explanation
When wages rise, each hour of leisure means giving up more earnings, so leisure becomes more expensive. The substitution effect therefore causes households to consume less leisure and supply more labour.
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