Two firms have the same factor cost. The first faces an indirect tax of ₹110 and a subsidy of ₹35, while the second faces an indirect tax of ₹95 and a subsidy of ₹10. Whose market price will be higher?
Answer and explanation
Correct answer: Second is higher by ₹10
Market price equals factor cost plus net indirect taxes, where NIT = indirect tax − subsidy. For the first firm, NIT = ₹110 − ₹35 = ₹75. For the second, NIT = ₹95 − ₹10 = ₹85. Because factor costs are equal, the second firm's market price is higher by ₹85 − ₹75 = ₹10. Thus option B is correct.
Frequently asked questions
What is the correct answer to this question?
Second is higher by ₹10
Why is this the correct answer?
Market price equals factor cost plus net indirect taxes, where NIT = indirect tax − subsidy. For the first firm, NIT = ₹110 − ₹35 = ₹75. For the second, NIT = ₹95 − ₹10 = ₹85. Because factor costs are equal, the second firm's market price is higher by ₹85 − ₹75 = ₹10. Thus option B is correct.
Which subject and chapter does this question cover?
This is a Class 12 Economics question. Chapter: National Income and Related Aggregates. Topic: Aggregates related to national income - Market price and factor cost.
