In the context of economics, which term best describes the relationship where higher potential rewards are associated with taking greater risks?

• A. Risk-return tradeoff
• B. Comparative advantage
• C. Law of diminishing returns
• D. Opportunity cost

Answer: (A)

Verified step by step guidance

1. Understand the concept of risk and reward in economics: higher potential rewards usually come with higher risks, meaning that to achieve greater returns, one must be willing to accept more uncertainty or potential loss.
2. Identify the term that captures this relationship between risk and reward. The term should describe how taking on more risk can lead to higher expected returns.
3. Review the given options: 'Risk-return tradeoff', 'Comparative advantage', 'Law of diminishing returns', and 'Opportunity cost'.
4. Recall the definitions: 'Comparative advantage' relates to efficiency in production, 'Law of diminishing returns' describes decreasing marginal output with additional input, and 'Opportunity cost' is the value of the next best alternative foregone.
5. Recognize that the 'Risk-return tradeoff' specifically refers to the economic principle that higher potential rewards are associated with taking greater risks, making it the best description of the relationship in question.