Given below are two statements: one is labelled as Assertion (A) and the other is labelled as Reason (R).
Assertion (A): Profits are often used by producers in the next period to buy new machinery or to build new factories.
Reason (R): The entrepreneur bears a large part of the risk associated with the firm.
In the light of the above statements, choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both (A) and (R) are true but (R) is not the correct explanation of (A).
Assertion (A): Profits are often used by producers in the next period to buy new machinery or to build new factories. — True. Producers put profits back into the firm to expand production.
Reason (R): The entrepreneur bears a large part of the risk associated with the firm. — True. The entrepreneur controls major decisions and bears much of the risk of the enterprise.
Why R does not explain A?
R tells us who bears the risk in a firm. It does not say why profits go into new machines or factories.
A is true because producers want to expand production. Spending on new machinery and factories raises productive capacity; such spending is investment expenditure.
NCERT (2026-27): “1.2 Context of the Present Book of Macroeconomics … A typical capitalist enterprise has one or several entrepreneurs (people who exercise control over major decisions and bear a large part of the risk associated with the firm/enterprise). … The rest of the revenue is the earning of the entrepreneurs and it is called profit. Profits are often used by the producers in the next period to buy new machinery or to build new factories, so that production can be expanded. These expenses which raise productive capacity are examples of investment expenditure.” |