The Criticism of The Risk Theory of Profit

The criticism of the risk theory of profit is as follows.

• The reward for risk reduction.
• No direct relation between risky and profit.
• The reward for uncertainty.
• Neglects other factors.
• Neglects monopoly price.

The reward for risk reduction

According to the profit, curve profit is the reward for risk avoidance for minimizing risk rather than risk-taking. An entrepreneur increases the profit by reducing risk with the use of this business ability.

No direct relation between risky and profit

This theory considers a direct relation between risky and profit. But there is no guarantee a higher risk must bring higher profit. Even less risky business may be earning very high profit while highly risky business may earn less profit.

Reward for uncertainty

Professor Knight says that profit is not for bearing every type of risky only one unpredictable or non-insurable risk brings profit.

Neglects other factors

This theory assumes the profit is influence by risk only. But profit is influence by many other factors like government policy, a situation of market demand, the ability of entrepreneurs, etc.

Neglects monopoly price

An entrepreneur can earn excessive profit by charging high prices if he has no monopoly in the production and supply of a commodity. This theory does not explain such a type of monopoly price.