Question

Given below are two statements:
Statement (I): Profit may be positive or negative.
Statement (II): Interest can not be zero or negative.
In light of the above statements, choose the most appropriate answer from the options given below:

• A. Both Statement (I) and Statement (II) are true.
• B. Both Statement (I) and Statement (II) are false.
• C. Statement (I) is true but Statement (II) is false.
• D. Statement (I) is false but Statement (II) is true.

Hint:

Profit represents a risk-bearing reward, which can result in positive gains or negative losses.
Interest represents a cost of borrowing capital, which cannot logically go below zero under standard economic paradigms.

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
This question explores the economic definitions of production factor rewards, specifically profit (reward for entrepreneurship) and interest (reward for capital).

Step 2: Detailed Explanation:
Let us evaluate both statements:
- Statement (I): Profit is the difference between total revenue and total cost.
An enterprise can make a surplus (positive profit) or incur a loss (negative profit) depending on market conditions.
Therefore, profit can indeed be positive or negative, making Statement (I) true.
- Statement (II): In classical economic theory, interest is the price paid for using capital.
Since capital is a scarce resource with alternative uses, the nominal interest rate must be positive to incentivize lenders.
No rational lender would lend money for a negative nominal return when they could simply hold cash.
Thus, under classical economic principles, interest cannot be zero or negative, making Statement (II) true.
Therefore, both statements are true.

Step 3: Final Answer:
Both Statement (I) and Statement (II) are true, corresponding to option 1.