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Factor cost is obtained from market price by:
AAdding indirect taxes and deducting subsidies
BDeducting indirect taxes and adding subsidies
CAdding both indirect taxes and the subsidies
DDeducting both indirect taxes and subsidies
Answer & Solution
Correct answer: B. Deducting indirect taxes and adding subsidies
1. Factor cost is the cost of production incurred by a firm, covering rent, wages, capital costs and the entrepreneur's profit margin.
2. Taxes are not part of that direct production cost, so they are excluded from factor cost, while subsidies are direct inputs into production and are included in it.
3. Moving from factor cost to market price therefore adds indirect taxes and deducts subsidies.
4. Reversing that gives the answer here: factor cost equals market price minus indirect taxes plus subsidies.
5. Option A states the market-price direction and is the single most common error, because the two equations are mirror images.
_Source: TN HSC Class 12 Economics (Samacheer Kalvi, Govt of Tamil Nadu), Ch 2 "National Income", §2.5 Factor cost and market price_
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