In the context of introduction to economics, when do prices serve as signals and incentives for producers to enter a market?

• A. When market prices fall below the equilibrium level, reducing producer surplus
• B. When market prices rise above the cost of production, indicating potential profit opportunities
• C. When demand for a product decreases, causing prices to drop
• D. When government sets price ceilings, limiting the maximum price producers can charge

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the role of prices in a market economy. Prices act as signals by conveying information about the scarcity or abundance of goods and services, and as incentives by motivating producers to adjust their production decisions.
2. Step 2: Recognize that when market prices rise above the cost of production, this signals to producers that there are potential profits to be made, encouraging them to enter the market or increase output.
3. Step 3: Contrast this with situations where prices fall below equilibrium or cost of production, which typically discourage producers from entering or continuing in the market due to reduced or negative profits.
4. Step 4: Note that changes in demand or government interventions like price ceilings can affect prices, but these do not directly serve as positive signals or incentives for producers to enter the market unless prices are above production costs.
5. Step 5: Conclude that prices serve as signals and incentives for producers to enter a market specifically when they rise above the cost of production, indicating profitable opportunities.