As the hourly wage rate climbs, the opportunity cost of leisure ?
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Answer: B. increases since the cost of forgoing one hour of work increases
Explanation
As the hourly wage rises, the opportunity cost of taking an hour off for leisure increases because the worker forgoes higher earnings. Higher wages make every hour spent resting more expensive in terms of unearned income. This rising opportunity cost creates a strong substitution effect favoring increased work hours. Opportunity cost represents the value of the next best alternative foregone when making a choice. Labor-leisure models analyze how workers respond to changes in hourly compensation rates. The substitution effect always predicts that higher wages increase the quantity of labor supplied.
Overtime pay incentives are designed to capitalize on this rising opportunity cost of leisure time. Professional workers evaluate rising salary offers against the personal value of their free time. Labor economists use opportunity cost principles to forecast workforce participation trends. Remains constant ignores the direct mathematical relationship between wage rates and forgone earnings. Decreases since the customer has more income describes the income effect, not the rising cost of leisure. May increase or decrease confuses the combined net outcome with the unambiguous direction of opportunity cost.
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