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Difficulty: MediumFactors of Production and Their Rewards

A sole proprietor borrows funds from a commercial bank to install automated processing machinery in a factory while personally making strategic operational decisions and bearing the uncertainty of market competition. Which economic return represents the specific reward accruing to the proprietor for organizing these resources and assuming the uninsurable business risk?

  1. A
    Interest
  2. ProfitAnswer
  3. C
    Rent
  4. D
    Wages

Answer

The reward accruing to the proprietor for organizing resources and assuming business uncertainty is profit.
Enterprise is the factor of production that coordinates land, labour, and capital, while taking on ultimate risk and decision-making responsibility. The economic reward that accrues to enterprise for bearing non-insurable risks and driving innovation is profit.

Step-by-Step Solution

1
Identify the factor of production described in the scenario.
The proprietor performs administrative coordination, decision-making, and risk-bearing, which defines the Enterprise (or Entrepreneurship) factor of production.
Different factors of production perform distinct roles within a commercial enterprise.
2
Differentiate between the rewards of capital and enterprise.
Capital yields interest (which is paid on the borrowed bank funds), whereas enterprise earns profit (the residual return for risk-bearing).
Borrowed funds incur fixed financial returns (interest), whereas risk-taking yields variable residual returns.
3
Match the specific economic role to its corresponding reward.
The residual yield for organizing factors and bearing uninsurable business risks is profit.
In commercial economics, each factor receives a specific designated reward.

Key Concept

Rewards of Factors of Production
Estimated Time:1m 0s
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Topics

Factors of Production and Their Rewards

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