Which of the following sentences best describes incentives in economics?

• A. Incentives only apply to businesses and not to individuals.
• B. Incentives always lead to negative outcomes for society.
• C. Incentives are irrelevant to decision-making in economics.
• D. Incentives are rewards or penalties that motivate people to act in certain ways.

Answer: (D)

Verified step by step guidance

1. Understand the concept of incentives in economics: Incentives are factors that motivate individuals or businesses to make decisions or take actions. They can be either rewards (positive incentives) or penalties (negative incentives).
2. Recognize that incentives apply broadly to both individuals and businesses, influencing their behavior and choices in economic activities.
3. Acknowledge that incentives do not always lead to negative outcomes; they can lead to positive, negative, or mixed results depending on the context.
4. Note that incentives are central to economic decision-making because they shape how resources are allocated and how people respond to changes in costs, benefits, and risks.
5. Conclude that the best description of incentives in economics is that they are rewards or penalties that motivate people to act in certain ways.