The substitution effect of a higher wage measures:

• A. the change in labor supplied as workers feel wealthier and choose more leisure
• B. the change in labor supplied as workers substitute leisure for work due to the higher opportunity cost of leisure
• C. the total increase in income resulting from a higher wage
• D. the effect of a wage increase on the demand for goods and services

Answer: (B)

Verified step by step guidance

1. Understand that the substitution effect in labor supply refers to how a change in wages affects the trade-off between leisure and work. When wages increase, the opportunity cost of leisure rises because workers give up more potential earnings by not working.
2. Recognize that the substitution effect causes workers to substitute leisure with more work since working becomes relatively more rewarding compared to leisure.
3. Distinguish the substitution effect from the income effect: the income effect occurs when higher wages make workers feel wealthier, potentially leading them to choose more leisure instead of more work.
4. Focus on the substitution effect as the change in labor supplied due to the change in relative prices (wages), holding utility constant, which means isolating the effect of the wage change on the choice between leisure and work without considering the change in overall wealth.
5. Summarize that the substitution effect measures the increase in labor supplied because workers respond to the higher opportunity cost of leisure by working more hours.