If the price of a good rises,then the effect on the income of the factors that are used intensively in its production will be
A)to raise income by an absolute amount that is less than the rise in prices.
B)to raise income by an absolute amount that is more than the rise in prices.
C)to raise income by a smaller percentage than the rise in prices.
D)to raise income by a greater percentage than the rise in prices.

Question

Quizplus · Accepted Answer

When the price of a good rises, the income of the factors used intensively in its production tends to increase by a greater percentage than the rise in prices. This is because the increased price leads to higher revenue for the producers, which is then distributed among the factors of production, such as labor and capital, used to produce the good. The percentage increase in income for these factors can outpace the percentage increase in the price of the good due to the leverage effect of fixed costs and the increased value added by these factors.

If the Price of a Good Rises,then the Effect on the Income