Which of the following describes the substitution effect?(1 point)

Question

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 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.

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.

Answer 1

The correct response that 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."

The substitution effect refers to the change in consumption patterns resulting from a change in the relative prices of goods or the opportunity cost of choosing one good over another. In this case, as wages (the price of leisure) increase, the opportunity cost of not working (choosing leisure) becomes higher, leading individuals to substitute away from leisure and choose more labor. The analogy with Coca Cola and Sprite illustrates how a rise in the price of one good leads consumers to substitute it with another good.