CMA Foundation · Fundamentals of Business Economics and Management · Means of Production
According to Frank Knight's theory, profit arises mainly as a reward for:
Under Knight's theory, profit is the reward for bearing non-insurable uncertainty. Insurable risks can be calculated and covered, so they become a cost, but true uncertainty cannot be predicted or insured, and the entrepreneur who bears it earns profit as the residual.
- ABearing non-insurable uncertaintyCorrect
- BSupplying capital to the firm
- CProviding labour services
- DOwning land used in production
Explanation
Knight distinguished insurable risk from true uncertainty, which cannot be calculated or insured against. Profit is the residual reward for bearing this uncertainty. Interest, wages and rent are the rewards for capital, labour and land, so they are wrong.
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