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Difficulty: MediumFactors of Production and Their Rewards

Profit earned by the entrepreneur is classified as a residual income rather than a contractual reward because its magnitude depends entirely on the financial outcome remaining after all explicit factor costs have been settled.

Answer: Answer

Answer

The statement is true because profit is a residual return accruing to enterprise after all contractual production expenses are satisfied.
The statement accurately distinguishes residual rewards from contractual factor rewards. Payments like rent, wages, and interest are fixed by contract prior to production and must be paid first. Profit is what remains for the entrepreneur after meeting all operational and contractual factor expenses.

Step-by-Step Solution

1
Analyze the nature of rewards for factors of production.
Rewards such as wages for labour, rent for land, and interest for capital are contractual payments fixed prior to business performance.
Contractual rewards must be paid at agreed rates regardless of whether the enterprise generates a financial surplus or deficit.
2
Examine the specific nature of entrepreneurial reward (profit).
Profit is not guaranteed; it is calculated as total business revenue minus total contractual expenses.
The entrepreneur bears uninsurable business risks and uncertainties, making profit a variable residual income.

Key Concept

Distinction between contractual factor rewards and residual factor rewards
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Topics

Factors of Production and Their Rewards

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