CMA Foundation · Fundamentals of Business Economics and Management · Means of Production
Which of the following risks borne by an entrepreneur is classified as an uncertainty that cannot be insured, according to Frank Knight's view?
A fall in demand due to a change in consumer tastes is the uninsurable uncertainty. Fire, theft and transit damage follow predictable patterns and can be insured, but shifts in market demand cannot be calculated statistically, so the entrepreneur bears them and earns profit as the reward.
- ALoss of stock due to fire
- BTheft of cash from the godown
- CFall in demand due to a change in consumer tastesCorrect
- DDamage to goods in transit by accident
Explanation
Fire, theft and transit accidents occur with predictable frequency, so insurers can calculate premiums and cover them. Changes in consumer tastes or market demand cannot be predicted statistically, so they are uninsurable uncertainty borne by the entrepreneur and justify profit.
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