Final answer:
In polycythemia, the body responds to decreased oxygen-carrying capacity by increasing red blood cell production, a process regulated by the hormone erythropoietin.
Step-by-step explanation:
The physiological response the body exhibits in polycythemia to compensate for decreased oxygen-carrying capacity is increased red blood cell production. This is initiated by the secretion of erythropoietin (EPO) primarily by the kidneys and to a lesser extent by the liver. EPO stimulates the bone marrow to produce more red blood cells (RBCs), which can help improve the oxygen-carrying capacity of the blood, despite the increased blood viscosity that challenges the heart's ability to pump blood. This condition is seen in various scenarios, including living at high altitudes, certain types of bone marrow diseases like polycythemia vera, or when the body is responding to a hypoxic environment.