An economy has two firms, A and B. Firm A uses no raw material and produces cotton worth Rs 60, which it sells to firm B. Firm B uses the cotton to produce cloth, which it sells to consumers for Rs 180. Firm B pays Rs 70 as wages and keeps the rest of its value added as profits. What are the profits of firm B?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Rs 50
Given:
Firm A: cotton Rs 60, no raw material
Firm B: cloth sold for Rs 180, cotton used Rs 60
Wages paid by B = Rs 70
Value added = sales − intermediate goods. A firm pays wages out of its value added and keeps the rest as profits.
Value added of B = 180 − 60 = 120
Profits of B = 120 − 70 = Rs 50
Rs 110 comes from subtracting wages from sales without first taking out the cotton.
NCERT (2026-27): “2.2.3 Income Method … Example: There are two firms, A and B. Suppose A uses no raw material and produces cotton worth Rs. 50. A sells its cotton to firm B, who uses it to produce cloth. B sells the cloth produced to consumers for Rs. 200. “2.2.1 The Product or Value Added Method … Therefore wages, interest, profits and rents paid out by the firm must add up to the value added of the firm. …” |