Investors respond to the incentive of:

• A. higher transaction costs
• B. potential financial returns or profits
• C. increased government regulation
• D. reduced market competition

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of incentives in microeconomics. Incentives are factors that motivate individuals or firms to act in a certain way, often to maximize their utility or profits.
2. Step 2: Analyze each option in terms of how it affects investor behavior. Higher transaction costs, increased government regulation, and reduced market competition generally act as barriers or disincentives rather than motivators.
3. Step 3: Recognize that investors are primarily motivated by the potential for financial returns or profits, which serve as positive incentives encouraging investment.
4. Step 4: Conclude that among the given options, 'potential financial returns or profits' is the correct incentive that investors respond to, as it aligns with the goal of maximizing their gains.
5. Step 5: Summarize that incentives in microeconomics guide decision-making, and in the context of investment, the promise of profits is the key motivating factor.