Introduction to Business EconomicsMTP May 24Question 748 of 209
All Questions

What social function is served by profits in a capitalist economic system?

Options

ATaxes on profits support government programs.
BThey provide an incentive for the reallocation of resources.
CProfits allow individuals to accumulate wealth and engage in capital investment.
DProfits result in higher levels of employment.
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Correct Answer

✅ Option b — They provide an incentive for the reallocation of resources.

All Options:

  • ATaxes on profits support government programs.
  • BThey provide an incentive for the reallocation of resources.
  • CProfits allow individuals to accumulate wealth and engage in capital investment.
  • DProfits result in higher levels of employment.

Detailed Solution & Explanation

To understand the social function served by profits in a capitalist economic system, let's break it down: • Profits act as a signal in the market, indicating where resources are being used efficiently and where they are not. • This signaling function guides entrepreneurs and businesses to allocate resources to areas that are profitable, thus promoting efficiency and innovation. • The reallocation of resources based on profit signals is essential for the growth and development of the economy, as it ensures that resources are used in the most valuable ways. The correct answer is right because it highlights the role of profits in guiding the allocation of resources, which is a fundamental principle of capitalist systems. In contrast, options like taxes on profits supporting government programs or profits allowing individuals to accumulate wealth, while related to profits, do not directly address the social function of profits in guiding resource allocation.

About This Chapter: Introduction to Business Economics

Paper

Paper 4: Business Economics

Weightage

5%

Key Topics

Meaning, Scope, Price Mechanism

This chapter lays the groundwork for understanding Business Economics as a discipline. It covers the meaning, scope, and nature of economics — including key distinctions like Microeconomics vs Macroeconomics, Positive vs Normative economics, and the fundamental economic problem of scarcity. Students learn how businesses use economic principles for decision-making in a competitive marketplace.

View Official ICAI Syllabus

Exam Strategy Tip

Focus on definitions and distinctions between concepts. Questions often test whether you understand the difference between Micro and Macro, or Positive and Normative statements.

Related Comparison Tables

Microeconomics vs Macroeconomics: The Complete CA Foundation GuidePositive vs Normative Economics: Fact vs Opinion

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