If subsidies rise while indirect taxes remain unchanged, what happens to NNP at factor cost (NNP₍FC₎) when NNP at market price (NNP₍MP₎) remains unchanged?
Answer and explanation
Correct answer: NNP₍FC₎ will rise
Net indirect taxes (NIT) equal indirect taxes minus subsidies. When subsidies increase and indirect taxes remain unchanged, NIT decreases. The conversion formula is NNP₍FC₎ = NNP₍MP₎ − NIT. Since NNP₍MP₎ is fixed, a decrease in NIT increases NNP₍FC₎. Therefore, option A is correct. This also shows that factor cost may exceed market price when subsidies are sufficiently high.
Frequently asked questions
What is the correct answer to this question?
NNP₍FC₎ will rise
Why is this the correct answer?
Net indirect taxes (NIT) equal indirect taxes minus subsidies. When subsidies increase and indirect taxes remain unchanged, NIT decreases. The conversion formula is NNP₍FC₎ = NNP₍MP₎ − NIT. Since NNP₍MP₎ is fixed, a decrease in NIT increases NNP₍FC₎. Therefore, option A is correct. This also shows that factor cost may exceed market price when subsidies are sufficiently high.
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 - NNP.
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