Which of the following is true of incentives in microeconomics?

• A. Incentives are irrelevant in markets with perfect competition.
• B. Incentives only affect government policy decisions, not individual choices.
• C. Incentives influence the choices and behavior of individuals and firms.
• D. Incentives always lead to socially optimal outcomes.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of incentives in microeconomics. Incentives are factors that motivate individuals and firms to make decisions and take actions. They can be positive (rewards) or negative (penalties).
2. Step 2: Analyze the role of incentives in different market structures, including perfect competition. Even in perfectly competitive markets, incentives matter because they influence how firms and consumers behave, such as how much to produce or consume.
3. Step 3: Consider the scope of incentives beyond government policy. Incentives affect not only government decisions but also the choices of individuals and firms in the marketplace.
4. Step 4: Evaluate the relationship between incentives and social outcomes. While incentives guide behavior, they do not always guarantee socially optimal outcomes due to factors like externalities or information asymmetries.
5. Step 5: Conclude that the correct understanding is that incentives influence the choices and behavior of individuals and firms, which is fundamental to microeconomic analysis.