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Question

Difficulty: MediumFactors of Production and Their Rewards

A manufacturing firm pays monthly rent for its factory premises, salaries to assembly workers, and interest on a commercial loan used to purchase machinery. After meeting all these operational expenses, the remaining earnings accrue to the owner as compensation for risk-bearing and business organization. Which factor of production receives this residual earnings stream as its reward?

  1. EnterpriseAnswer
  2. B
    Capital
  3. C
    Labour
  4. D
    Land

Answer

Enterprise receives residual earnings (profit) as its reward for risk-taking and business organization.
Enterprise (or the entrepreneur) is the factor of production that combines land, labour, and capital, taking on financial and market risks. Its reward is profit, which represents the residual earnings left over after paying rent, wages, and interest.

Step-by-Step Solution

1
Identify the payment types mentioned in the scenario
Rent is paid for premises (Land), salaries for workers (Labour), and interest for loans/machinery (Capital).
Categorizing fixed factor payments clarifies which factor rewards have already been settled.
2
Determine the factor responsible for residual income
The owner assumes ultimate uncertainty, coordinates the other factors, and claims the remaining net profit after all explicit costs are covered.
Profit is uniquely earned by the entrepreneur for risk-bearing and managerial decision-making.

Key Concept

Factors of Production and Their Rewards (Enterprise and Profit)
Estimated Time:1m 0s
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Topics

Factors of Production and Their Rewards

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