Which of the following best explains how innovation promotes economic growth?

• A. Innovation decreases consumer demand by making products obsolete.
• B. Innovation increases productivity, allowing more goods and services to be produced with the same amount of resources.
• C. Innovation reduces the need for investment in education and training.
• D. Innovation leads to higher unemployment by replacing workers with machines.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of innovation in microeconomics. Innovation refers to the introduction of new technologies, products, or methods that improve efficiency or create new opportunities in the economy.
2. Step 2: Recognize that economic growth is often driven by increases in productivity, which means producing more output with the same or fewer inputs.
3. Step 3: Analyze how innovation affects productivity. Innovation typically allows firms to produce more goods and services using the same amount of resources, effectively increasing productivity.
4. Step 4: Evaluate the other options by considering their economic implications. For example, innovation does not necessarily decrease consumer demand or reduce the need for education; rather, it often changes the nature of demand and skills required.
5. Step 5: Conclude that the best explanation is that innovation promotes economic growth by increasing productivity, enabling more goods and services to be produced with the same resources.