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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Individual consumers, firms and markets are examined through demand and supply, elasticity, consumer choice, production, costs, revenue and the determination of prices and output. The topic also covers market structures such as perfect competition, monopoly and oligopoly, plus market failure, externalities and the distinction between microeconomic decisions and economy-wide outcomes.
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