Understanding Profits as a Reward and Incentive for Risk-Taking in Business

Profits are both the reward and the incentive for risk taking.

a-true
b-false

Final answer:

Profits serve as both a reward for past risk-taking and an incentive for future expansion and innovation in business, with increased industry profits potentially leading to new firms entering the market.

Explanation:

The statement that profits are both the reward and the incentive for risk-taking in a competitive market is true. In a market economy, businesses aim for profit, which can be calculated as Profit = Total Revenue - Total Cost. When a business generates profits, this serves as a reward for the risks taken, such as investments in new projects and ventures. Moreover, these profits become an incentive, prompting businesses to pursue expansion and improvement for greater success. Notably, increased profits can lead to what is referred to as entry, where new firms are attracted to the industry, motivated by the opportunity to earn similar rewards.

Why are profits considered both a reward and an incentive for risk-taking in business?

Profits are seen as a reward because they compensate businesses for the risks they have taken, such as investing in new ventures. Additionally, profits serve as an incentive for further growth and innovation, motivating businesses to expand and improve in order to achieve greater success.