The Labor Market Quick Check

Question

4 of 54 of 5 Items
Question
Which of the following describes the substitution effect?(1 point)
Responses

As wages increase, an individual's total potential income rises, making him more likely to choose leisure over labor. A consumer buys more milk each time they purchase cereal.
As wages increase, an individual's total potential income rises, making him more likely to choose leisure over labor. A consumer buys more milk each time they purchase cereal.

As wages increase, an individuals leisure becomes less costly, making him more likely to choose leisure over labor. As hamburgers becomes cheaper consumers purchase more steak.
As wages increase, an individuals leisure becomes less costly, making him more likely to choose leisure over labor. As hamburgers becomes cheaper consumers purchase more steak.

As wages increase, an individual's total potential income rises, making him less likely to choose leisure over labor. As a consumer increases their income they purchase more desserts, a normal good.
As wages increase, an individual's total potential income rises, making him less likely to choose leisure over labor. As a consumer increases their income they purchase more desserts, a normal good.

As wages increase, an individual's leisure becomes more costly, making him less likely to choose leisure over labor. As the price of Coca Cola rises consumers purchase more Sprite.
As wages increase, an individual's leisure becomes more costly, making him less likely to choose leisure over labor. As the price of Coca Cola rises consumers purchase more Sprite.

Answer 1

The substitution effect describes how a change in the price of a good affects the quantity demanded of that good in relation to other goods. In the context of labor and leisure, when wages increase, leisure becomes more costly because the opportunity cost of taking time off work increases.

From the responses you provided, the statement that best describes the substitution effect is:

"As wages increase, an individual's leisure becomes more costly, making him less likely to choose leisure over labor. As the price of Coca Cola rises consumers purchase more Sprite."

This response captures the essence of the substitution effect by indicating that as the cost of one option (leisure) increases, individuals are more likely to substitute that option for another (work). The example of Coca Cola and Sprite illustrates how consumers may switch to substitute goods when the price of one rises.