Aggregates related to national income - Market price and factor cost

Correct answer: C. ₹8,300 crore

Explanation: The governing relation is Market Price = Factor Cost + Net Indirect Taxes, where Net Indirect Taxes equal indirect taxes minus subsidies. Here, net indirect taxes = ₹640 − ₹140 = ₹500 crore. Therefore, market price = ₹7,800 + ₹500 = ₹8,300 crore, so option C is correct. Options A, B, and D result from using an incorrect tax or subsidy adjustment.

Correct answer: B. When subsidies exceed indirect taxes

Explanation: Market price differs from factor cost by net indirect taxes: Market Price − Factor Cost = Indirect Taxes − Subsidies. For market price to be lower, this difference must be negative. That occurs when subsidies exceed indirect taxes, making net indirect taxes negative. Thus option B is correct. If taxes exceed subsidies, the market price is higher; if both are zero, the two prices are equal.

Correct answer: C. The gap will remain unchanged

Explanation: The gap between market price and factor cost equals net indirect taxes: Indirect Taxes − Subsidies. Suppose both rise by the same amount x. The new gap becomes (Taxes + x) − (Subsidies + x), which simplifies to Taxes − Subsidies. Since the equal increases cancel each other, the gap remains unchanged. Therefore, option C is correct; it does not necessarily rise, fall, or become zero.

Correct answer: B. ₹9,690 crore

Explanation: To move from market price to factor cost, subtract net indirect taxes. First calculate the tax amount: 5% of ₹10,200 crore = (5/100) × 10,200 = ₹510 crore. Therefore, factor cost = ₹10,200 − ₹510 = ₹9,690 crore. Option B is correct. Option A uses an incorrect percentage, while options C and D do not apply the required subtraction correctly.

Correct answer: B. FC = MP − NIT

Explanation: The governing concept is the conversion between market price and factor cost. Market price includes net indirect taxes, whereas factor cost measures payments to factors of production. Therefore, to obtain factor cost, net indirect taxes must be subtracted: FC = MP − NIT. Option B is correct. Depreciation and NFIA are used in other national-income adjustments and do not determine this direct conversion.

Correct answer: B. MP = FC + NIT

Explanation: The governing relation is Market Price = Factor Cost + Net Indirect Taxes. Market price reflects factor payments plus the net tax component, so net indirect taxes are added when moving from factor cost to market price. Hence option B is correct. Option A reverses the conversion, while depreciation and NFIA are separate adjustments and cannot be used in this formula.

Correct answer: C. Indirect tax

Explanation: Factor income consists of payments received by factors of production: rent for land, wages for labour, interest for capital and profit for entrepreneurship. An indirect tax is paid to the government rather than received by a factor, so it is included in market price but is not factor income. Therefore option C is correct; rent, interest and profit are all factor incomes.

Correct answer: B. Zero

Explanation: Net indirect taxes are calculated as Indirect Taxes − Subsidies. Here, both amounts are ₹95 crore, so net indirect taxes = ₹95 crore − ₹95 crore = zero. Therefore option B is correct. The result is not ₹95 crore, because that would ignore the subsidy, and it is not ₹190 crore, because the two amounts are not added. With zero NIT, market price equals factor cost.

Correct answer: B. Market price

Explanation: The amount paid by a consumer in the marketplace is the market price of the good. It is the price at which the final product is purchased and may include indirect taxes, while subsidies can reduce the amount paid or its effective price. Factor cost refers to payments received by factors of production, factor income is their earning, and depreciation is loss of capital value. Thus, option B is correct.

Correct answer: C. Factor cost

Explanation: Wages, rent, interest and profit are the four major factor payments: wages reward labour, rent rewards land, interest rewards capital, and profit rewards enterprise. Their aggregate is called factor cost because it represents the cost of using factors in production. Market price is the consumer’s price and may include indirect taxes; net exports concern foreign trade, and indirect tax is only one government levy. Therefore, option C is correct.

Correct answer: B. ₹140 crore

Explanation: The excess of market price over factor cost equals net indirect taxes. Net Indirect Taxes = Indirect Taxes − Subsidies = ₹210 crore − ₹70 crore = ₹140 crore. Therefore, market price exceeds factor cost by ₹140 crore. Option A ignores the tax amount that remains after the subsidy, option C ignores subsidies completely, and option D adds taxes and subsidies instead of subtracting them. Hence, option B is correct.

Correct answer: C. The difference between indirect taxes and subsidies is zero

Explanation: The governing identity is Market Price = Factor Cost + Net Indirect Taxes, where net indirect taxes equal indirect taxes minus subsidies. If market price equals factor cost, net indirect taxes must be zero. Thus indirect taxes and subsidies are equal in amount, although both may be positive. Option C is correct; neither tax nor subsidy individually must be zero.

Correct answer: C. They will remain unchanged

Explanation: Rearrange MP = FC + NIT to obtain NIT = MP − FC. The change in NIT is therefore ΔNIT = ΔMP − ΔFC = ₹1,000 crore − ₹1,000 crore = zero. Equal increases in market price and factor cost leave their difference unchanged. Hence option C is correct; the other choices incorrectly treat one common increase as a change in the gap.

Correct answer: C. It will remain unchanged

Explanation: The gap between market price and factor cost equals net indirect taxes: MP − FC = indirect taxes − subsidies. If both indirect taxes and subsidies increase by ₹300 crore, their difference changes by +₹300 − +₹300 = ₹0. Consequently, the gap remains unchanged. Option A or B would be possible only if the two components changed by unequal amounts; option D has no basis.

Correct answer: A. Increase in indirect tax

Explanation: Factor cost measures payments to factors of production, including wages, rent, interest and profit. An indirect tax is added to factor cost to obtain market price, so a rise in indirect tax can increase market price without directly changing the factor payments. Wages, rent and profit are themselves factor-income components and therefore directly affect factor cost. Thus option A is correct.

Correct answer: B. Increase in wage payments

Explanation: Factor cost is the total remuneration paid to factors of production. Wages are the remuneration of labour, so an increase in wage payments directly raises factor cost, assuming other components are unchanged. Subsidies and taxes, including customs duty and GST, are adjustments used in moving between factor cost and market price; they do not directly constitute factor remuneration. Therefore option B is correct.

Correct answer: C. ₹700 crore

Explanation: The governing identity is market price = factor cost + net indirect taxes. Rearranging gives net indirect taxes = market price − factor cost. Thus NIT = ₹10,200 crore − ₹9,500 crore = ₹700 crore. Option A, B and D result from subtracting incorrectly or using an unrelated amount. The difference between what consumers pay and producers receive is precisely the net indirect tax adjustment.

Correct answer: C. Factor cost exceeds market price

Explanation: Market price equals factor cost plus net indirect taxes. If net indirect taxes are negative, subsidies exceed indirect taxes, so the adjustment added to factor cost is below zero. Consequently, market price is lower than factor cost, or factor cost is higher than market price. Thus option C is correct. Option A reverses the implication, option B applies only when NIT is zero, and option D is not necessary.

Correct answer: C. MP = FC + T − S

Explanation: Indirect taxes raise the price paid in the market, while subsidies reduce the effective market-price adjustment. Net indirect taxes are defined as T − S. The standard relationship is MP = FC + NIT, so substituting gives MP = FC + T − S. Hence option C is correct. Option A incorrectly adds subsidies, and options B and D subtract the tax even though taxes increase the market-price measure relative to factor cost.

Correct answer: C. Net indirect taxes are zero

Explanation: The governing identity is Market Price = Factor Cost + Net Indirect Taxes. If market price and factor cost are equal, subtracting factor cost from both sides gives net indirect taxes = zero. Therefore, option C must be correct. This does not require indirect taxes or subsidies to be individually zero: they may both exist at equal values. Direct taxes are not part of this conversion identity, so option D does not follow.

Correct answer: C. They will remain unchanged

Explanation: Net indirect taxes equal Market Price − Factor Cost. If both quantities decline by the same ₹1,500 crore, the new difference is (MP − 1,500) − (FC − 1,500) = MP − FC. The equal changes cancel, so net indirect taxes remain unchanged. The amount does not automatically become zero, and it cannot be said to rise or fall without unequal changes in the two components.

Correct answer: C. They will remain unchanged

Explanation: Net indirect taxes are defined as indirect taxes minus subsidies. Let the original values be T and S, so net taxes are T − S. After equal falls, the values become T − 450 and S − 450; their difference is (T − 450) − (S − 450) = T − S. Therefore, net indirect taxes remain unchanged. An equal reduction in both components does not make the difference negative or change it by ₹450 crore.

Correct answer: A. Increase in indirect tax

Explanation: The governing identity is Market Price = Factor Cost + Net Indirect Taxes. An increase in an indirect tax raises the tax component added to factor cost, so market price can increase while factor cost remains unchanged. Wages, rent, and interest are factor payments and are components of factor cost; increases in them change factor cost directly rather than being an independent market-price adjustment.

Correct answer: B. Reduction in wage payments

Explanation: Factor cost is the sum of payments made to factors of production, including wages, rent, interest, and profit. Therefore, a reduction in wage payments can directly reduce factor cost. Indirect taxes and customs duties are tax adjustments related to market price, while a subsidy generally affects the valuation gap rather than being a factor payment. Hence option B is correct.

Correct answer: C. ₹900 crore

Explanation: The difference between market price and factor cost equals net indirect taxes: Net Indirect Taxes = Market Price − Factor Cost. Substituting the given values gives ₹12,800 − ₹11,900 = ₹900 crore. Thus, consumers pay ₹900 crore more than the factor-cost receipts of producers because of the net tax adjustment. The other options involve incorrect subtraction.