If factor payments fall and productivity also falls, what is the correct analysis of the firms’ situation?
Answer and explanation
Correct answer: Costs may fall, but production capacity may also weaken
A fall in factor payments can reduce the direct cost of employing or using factor services. However, falling productivity means that each unit of input produces less output, so productive efficiency and effective capacity may weaken. The lower cost does not guarantee higher profits, higher sales, or greater output because the productivity decline may offset the cost advantage. A sound analysis must therefore consider both sides: the possible reduction in factor cost and the possible deterioration in production capability. Option A captures this balanced conclusion.
Frequently asked questions
What is the correct answer to this question?
Costs may fall, but production capacity may also weaken
Why is this the correct answer?
A fall in factor payments can reduce the direct cost of employing or using factor services. However, falling productivity means that each unit of input produces less output, so productive efficiency and effective capacity may weaken. The lower cost does not guarantee higher profits, higher sales, or greater output because the productivity decline may offset the cost advantage. A sound analysis must therefore consider both sides: the possible reduction in factor cost and the possible deterioration in production capability. Option A captures this balanced conclusion.
Which subject and chapter does this question cover?
This is a Class 11 Economics question. Chapter: National Income and Related Aggregates.
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