Tag: Factor Pricing

UGC NET Economics Unit-1-Factor Pricing-MCQs

UGC NET ECONOMICS: FACTOR PRICING

1.

Factor pricing theory is also known as:
A) Theory of Value
B) Theory of Cost
C) Theory of Distribution
D) Theory of Exchange
Answer: C

2.

The Marginal Productivity Theory states that each factor is paid:
A) The total value of its contribution
B) According to its marginal product
C) According to average productivity
D) A fixed wage rate
Answer: B

3.

According to Marginal Productivity Theory, a firm is in equilibrium when:
A) $M R P = M F C$
B) $M R = M C$
C) $A R = A C$
D) $M F C = M P$
Answer: A

4.

Under perfect competition, the equilibrium condition in factor markets is:
A) $M R P = M F C = P_{f}$
B) $M R P > M F C$
C) $M F C = 0$
D) $P_{f} > M R$
Answer: A

5.

Value of Marginal Product (VMP) equals:
A) $M P \times M R$
B) $M P \times P r i c e$
C) $M R - M C$
D) $M P / P r i c e$
Answer: B

6.

When product market is imperfect, the relationship between VMP and MRP is:
A) $V M P = M R P$
B) $V M P < M R P$
C) $V M P > M R P$
D) $V M P = 0$
Answer: C

7.

The demand for a factor is:
A) Autonomous
B) Independent
C) Derived demand
D) Complementary demand
Answer: C

8.

Which of the following is not an assumption of the Marginal Productivity Theory?
A) Perfect competition
B) Homogeneous factors
C) Imperfect knowledge
D) Full employment
Answer: C

9.

The Marginal Revenue Product (MRP) of a factor is the:
A) Additional output per extra unit of factor
B) Extra revenue earned from one more unit of factor
C) Average revenue per unit of factor
D) Price per unit of factor
Answer: B

10.

The Marginal Productivity Theory was refined and popularized by:
A) Ricardo and Mill
B) Marshall and Clark
C) Adam Smith and Keynes
D) Hicks and Kaldor
Answer: B

11.

The Modern Theory of Factor Pricing determines factor prices by:
A) Productivity alone
B) Supply of factors alone
C) Interaction of demand and supply of factors
D) Government intervention
Answer: C

12.

When $M R P < M F C$ , a profit-maximizing firm should:
A) Employ more of the factor
B) Reduce employment of the factor
C) Keep employment constant
D) Increase factor price
Answer: B

13.

Under monopsony in a labour market, equilibrium occurs when:
A) $W = M R P L$
B) $M F C = M R P L$
C) $W > M R P L$
D) $W = M F C$
Answer: B

14.

Under monopsony, the wage rate is:
A) Higher than in perfect competition
B) Equal to MRP
C) Lower than in perfect competition
D) Always zero
Answer: C

15.

The Ricardian Theory of Rent assumes that rent arises due to:
A) Scarcity of land
B) Fertility differences among lands
C) Monopoly power
D) Labour productivity
Answer: B

16.

According to Ricardo, no-rent land refers to:
A) The most fertile land
B) The least fertile land under cultivation
C) Unused barren land
D) Land with highest productivity
Answer: B

17.

Economic rent is:
A) Payment to land only
B) Surplus over opportunity cost
C) Equal to transfer earnings
D) Dependent on sunk costs
Answer: B

18.

The Modern Theory of Rent (Scarcity Rent) was proposed by:
A) David Ricardo
B) Marshall
C) Hicks
D) Robbins
Answer: B

19.

The Subsistence Theory of Wages was given by:
A) J.S. Mill
B) Ricardo
C) David Ricardo and Lassalle
D) Adam Smith
Answer: C

20.

According to Marginal Productivity Theory of Wages, the wage rate equals:
A) Average productivity of labour
B) Marginal revenue productivity of labour
C) Total revenue divided by number of workers
D) Wage fund per worker
Answer: B

21.

The Loanable Funds Theory explains the determination of:
A) Rent
B) Wage
C) Interest rate
D) Profit
Answer: C

22.

According to Loanable Funds Theory, the rate of interest is determined by:
A) Demand and supply of loanable funds
B) Marginal productivity of capital
C) Government policy
D) Saving alone
Answer: A

23.

The Keynesian Liquidity Preference Theory suggests that:
A) Interest is reward for saving
B) Interest is reward for productivity
C) Interest is reward for parting with liquidity
D) Interest equals rate of return on capital
Answer: C

24.

According to Knight’s Risk Theory, profit is:
A) A reward for innovation
B) A return for bearing uncertainty
C) A payment for management
D) A premium on capital
Answer: B

25.

According to Schumpeter’s Innovation Theory, profit arises due to:
A) Monopoly power
B) Risk-taking
C) Innovations and technological changes
D) Labour productivity
Answer: C

26.

In general equilibrium, factor prices are determined:
A) Independently in each market
B) Simultaneously in all markets
C) By the government only
D) By consumer preferences
Answer: B

27.

In a perfectly competitive factor market, the supply curve of a factor is:
A) Perfectly elastic
B) Perfectly inelastic
C) Backward bending
D) Upward sloping
Answer: A

28.

Under imperfect product markets, the MRP curve lies:
A) Above VMP curve
B) Below VMP curve
C) Coincides with VMP curve
D) Equal to average cost curve
Answer: B

29.

When demand for labour increases while supply remains constant, equilibrium wage will:
A) Fall
B) Rise
C) Remain same
D) Become negative
Answer: B

30.

In a bilateral monopoly (one buyer and one seller of labour), wages are determined by:
A) Government policy
B) Collective bargaining
C) Marginal productivity
D) Random negotiation
Answer: B

November 1, 2025

UGC NET Economics Unit 1-Factor Pricing

(Unit 1 – Microeconomics)
Based on the UGC NET Economics syllabus and referenced from your uploaded MA Microeconomics textbook.

1. Introduction to Factor Pricing

Factor pricing deals with how the rewards (prices) of factors of production—land, labour, capital, and entrepreneurship—are determined in the factor market.
These rewards are:

Factor	Reward
Land	Rent
Labour	Wages
Capital	Interest
Entrepreneurship	Profit

Thus, factor pricing theory is also known as the theory of distribution because it explains how the national income is distributed among the different factors of production.

2. Meaning and Scope

The study of factor pricing focuses on:

Determining the price (remuneration) of each factor.
Understanding factor demand and supply.
Explaining functional distribution (income distribution among factors).
Analysing market imperfections and their effect on factor earnings.

It answers:

Why do workers receive different wages?
Why is rent earned by land?
Why does capital earn interest?
Why do entrepreneurs make profits or incur losses?

3. Theories of Factor Pricing

There are two broad approaches:

A. Macro Theory of Distribution

Deals with total national income and its division among the factors.
Concerned with the shares of wages, rent, interest, and profit in national income.
Example: Ricardian distribution theory.

B. Micro Theory of Distribution

Deals with the reward of a particular factor in a specific industry.
Example: Marginal Productivity Theory of Distribution.

4. Marginal Productivity Theory of Distribution

This is the most prominent theory of factor pricing.

Assumptions

Perfect competition in product and factor markets.
Homogeneous factors.
Perfect mobility of factors.
Full employment.
Diminishing marginal productivity.
Profit-maximizing firm.

Concept

A rational firm will employ a factor up to the point where:

$Marginal Revenue Product (MRP) = Marginal Factor Cost (MFC)$

In a perfectly competitive factor market:

$M F C = P r i c e (of the factor)$

Thus, equilibrium occurs when:

$MRP = Factor Price$

Diagrammatic Explanation

![MRP Curve](conceptual representation)

The MRP curve is downward-sloping due to diminishing marginal productivity.
The MFC line (wage rate or factor price) is horizontal under perfect competition.
The intersection determines equilibrium employment and factor price.

Mathematical Expression

$M R P = M P \times M R$

Under perfect competition, $M R = P$ , so:

$M R P = M P \times P$

Hence, factor price = MRP at equilibrium.

Implications

Every factor is paid according to its contribution to production.
Explains both demand and price determination for factors.
Income distribution is based on productivity, not exploitation.

5. Concepts Related to Marginal Productivity Theory

Concept	Meaning
Average Product (AP)	Output per unit of factor employed.
Marginal Product (MP)	Additional output from one more unit of factor.
Value of Marginal Product (VMP)	MP × Price of output.
Marginal Revenue Product (MRP)	MP × Marginal Revenue (under imperfect competition).
Marginal Factor Cost (MFC)	Additional cost from employing one more unit of a factor.

Under perfect competition:

$V M P = M R P = F a c t o r P r i c e$

6. Criticisms of Marginal Productivity Theory

Unrealistic assumptions (perfect competition rarely exists).
Circular reasoning – price of factor depends on product price, which depends on cost, which again depends on factor prices.
Static model – ignores time and technological changes.
Immobility of factors in reality.
Non-measurable productivity for collective factors (e.g., teamwork).

Despite these, the theory is foundational and forms the basis of modern factor pricing models.

7. Modern Theory of Factor Pricing

The modern approach integrates both demand and supply of factors.
A factor’s price is determined by the interaction of its demand (MRP) and supply.

Equilibrium Condition:

$D_{f} = S_{f}$

where
$D_{f}$ = Demand for factor (MRP curve)
$S_{f}$ = Supply of factor (upward sloping)

The intersection gives the equilibrium factor price (wage, rent, interest, or profit).

Determination of Factor Price

Market Condition	Outcome
Perfect competition (factor & product)	$M R P = M F C = P$
Imperfect product market	$P > M R$ , so $M R P < V M P$
Imperfect factor market	$M F C > w a g e$ , so lower employment

8. Theories of Individual Factor Pricing

A. Rent (Land) – Ricardian Theory of Rent

Rent arises due to differences in fertility of land.
Rent = Surplus over the cost of cultivation on the marginal land.

$Economic Rent = Total Revenue - Total Cost$

B. Wages (Labour) – Marginal Productivity Theory & Modern Theories

Wages determined where:

$M R P_{L} = W$

Under monopoly, wages may be below MRP.
Modern extensions include bargaining, efficiency wage, and labour union effects.

C. Interest (Capital) – Classical and Modern Theories

Classical Theory: Interest determined by demand (investment) and supply (saving).
Loanable Funds Theory: Interest = interaction of demand and supply of loanable funds.
Keynesian Theory: Interest determined by liquidity preference and money supply.

$i = f (L P, M)$

D. Profit (Entrepreneurship) – Risk and Innovation Theories

Risk Theory (Knight): Profit is a reward for bearing uncertainty.
Innovation Theory (Schumpeter): Profit arises due to innovation and entrepreneurial dynamism.
Dynamic Theory: Profit results from changes in demand, technology, and organisation.

9. Modern View: General Equilibrium of Factor Markets

Using Walrasian General Equilibrium, all factor prices are interdependent:

Each factor’s demand depends on product demand.
Product price depends on factor costs.
Hence, equilibrium requires simultaneous determination of all factor prices.

Mathematically, equilibrium is achieved when:

$\sum_{i} D_{i} = \sum_{i} S_{i} for all factors i$

10. Efficiency and Welfare Implications

Efficiency Type	Factor Market Condition	Achieved When
Allocative Efficiency	$P_{f a c t o r} = M R P$	Yes (Perfect Competition)
Distributive Efficiency	Each factor paid according to productivity	Yes
Pareto Optimality	No reallocation can improve welfare	Achieved in equilibrium

11. Factor Pricing under Imperfect Competition

Type	Key Features	Outcome
Monopsony in Labour Market	Single buyer of labour	$M F C > W a g e$ ; lower employment
Monopoly in Product Market	$M R < P$ ; $M R P < V M P$	Lower factor demand
Bilateral Monopoly	Single buyer & single seller	Wage set through bargaining
Oligopsony	Few buyers	Wages depressed below competitive level

12. Summary Table

Factor	Classical Theory	Modern/Keynesian Theory	Key Determinant
Land (Rent)	Differential fertility (Ricardo)	Scarcity rent	Productivity & scarcity
Labour (Wages)	Subsistence & marginal productivity	Demand-supply equilibrium	Productivity & bargaining
Capital (Interest)	Abstinence (saving)	Liquidity preference	Supply of money & savings
Entrepreneur (Profit)	Risk & uncertainty	Innovation & monopoly power	Change, risk, innovation

13. UGC NET Focus Areas

Subtopic	Weightage	Concepts to Master
Marginal Productivity Theory	25%	$M R P = M F C$ , efficiency
Rent Theories	20%	Ricardian & scarcity rent
Wage Determination	20%	Competitive vs monopsony
Interest & Profit	20%	Loanable funds, innovation theory
General Equilibrium of Factor Markets	15%	Pareto efficiency

14. Key Takeaways

Factor pricing explains income distribution across productive agents.
Marginal productivity is the cornerstone of classical and neoclassical thought.
Modern theories integrate demand and supply to form realistic explanations.
Market imperfections (monopoly, monopsony, unions) alter equilibrium prices.
Efficient factor markets ensure Pareto optimal allocation of resources.

November 1, 2025