If subsidies increase while indirect taxes remain unchanged then what happens to the gap between market price and factor cost?
Answer and explanation
Correct answer: It will decrease
The governing relationship is Market Price = Factor Cost + Net Indirect Taxes, where Net Indirect Taxes equal indirect taxes minus subsidies. If indirect taxes stay unchanged but subsidies increase, net indirect taxes decrease. Therefore, the gap between market price and factor cost becomes smaller, so option B is correct. It need not become zero unless subsidies exactly equal indirect taxes.
Frequently asked questions
What is the correct answer to this question?
It will decrease
Why is this the correct answer?
The governing relationship is Market Price = Factor Cost + Net Indirect Taxes, where Net Indirect Taxes equal indirect taxes minus subsidies. If indirect taxes stay unchanged but subsidies increase, net indirect taxes decrease. Therefore, the gap between market price and factor cost becomes smaller, so option B is correct. It need not become zero unless subsidies exactly equal indirect taxes.
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.
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