Which of the following best explains how monetary and non-monetary incentives impact individual decision-making according to microeconomic theory?

• A. Non-monetary incentives are more influential than monetary incentives in all economic decisions.
• B. Incentives do not affect individual decision-making because choices are based solely on personal preferences.
• C. Only monetary incentives affect decisions, while non-monetary incentives have no impact on individual choices.
• D. Both monetary and non-monetary incentives can alter the costs and benefits associated with choices, leading individuals to change their behavior.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of incentives in microeconomics. Incentives are factors that motivate individuals to make certain decisions by affecting the perceived costs and benefits of different options.
2. Step 2: Recognize that incentives can be monetary (involving money, such as wages, prices, or fines) or non-monetary (involving other factors, such as social approval, personal satisfaction, or time).
3. Step 3: Recall that according to microeconomic theory, individuals make decisions by comparing the marginal benefits and marginal costs of their choices, aiming to maximize their utility or satisfaction.
4. Step 4: Analyze how both monetary and non-monetary incentives influence this decision-making process by changing the perceived costs or benefits, which can lead to changes in behavior.
5. Step 5: Conclude that the best explanation is that both types of incentives can alter the cost-benefit analysis individuals perform, thereby impacting their choices, rather than one type being exclusively influential or incentives having no effect.