An increase in the wage from W₁ to W₂ shifts the budget constraint from BC₁ to BC₂, and the optimal consumption–leisure bundle changes from A to B. The substitution effect of the wage increase, which decreases leisure and increases consumption because leisure has become relatively more costly, accounts for the shift from bundle A to A′, the tangency of U₁ and BC′. The shift from A′ to B is the income effect.