Which statement best describes incentives in economics?

• A. Incentives are irrelevant to consumer and producer behavior in markets.
• B. Incentives are factors that motivate individuals to act in certain ways by altering the costs or benefits of their actions.
• C. Incentives only apply to monetary rewards and do not affect non-financial decisions.
• D. Incentives always lead people to make irrational choices.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of incentives in economics. Incentives are factors that influence the decisions and behaviors of consumers and producers by changing the perceived costs or benefits associated with different actions.
2. Step 2: Recognize that incentives are not limited to monetary rewards; they can also include non-financial factors such as social approval, convenience, or personal satisfaction.
3. Step 3: Analyze how incentives affect decision-making by motivating individuals to choose options that maximize their utility or profit, given the altered costs or benefits.
4. Step 4: Note that incentives are relevant and central to economic behavior, as they help explain why people respond to changes in prices, policies, or other economic variables.
5. Step 5: Conclude that the best description of incentives is that they motivate individuals to act in certain ways by altering the costs or benefits of their actions, rather than being irrelevant, solely monetary, or always leading to irrational choices.