According to the Substitution Effect, in Response to an Increase

question 28

Multiple Choice

According to the substitution effect, in response to an increase in her wage, a person will

• A) reduce hours worked because she wants to substitute leisure for work.
• B) reduce hours worked because she wants to substitute work for leisure.
• C) increase hours worked because leisure has become relatively more expensive than consumption.
• D) increase hours worked because leisure has become relatively less expensive than consumption.
• E) increase both consumption and hours of leisure.

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Definitions:

Operating Leverage

Operating leverage refers to the degree to which a company or project can increase operating income by increasing revenue.

Total Leverage

The combination of operating leverage (affecting operating income) and financial leverage (affecting net income), indicating total risk.

Financial Leverage

The use of borrowed funds to finance the acquisition of assets, with the expectation that the profits made will be greater than the interest payable.

Net Income

The total profit of a company after all expenses and taxes have been subtracted from revenues.