Question

Which of the following constitute the reason for difference between Market Prices and Factor Cost?

• A. Indirect Taxes
• B. Subsidies
• C. Both (a) and (b)
• D. Neither (a) nor (b)

Answer 1

The correct option is C Both (a) and (b)

Market price is basically the current price at which an asset is bought or sold in the market. It includes the cost of production in the form of wages,rent,interest,profit.etc. whereas factor cost may not reflect the effect of taxes and subsidies unlike market price. It takes into account only of the actual cost of production including the profit. Hence, the reason for difference between market price and factor cost is indirect taxes and subsidies.