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The government grants a per-unit subsidy to producers of a good. Other things constant, the most likely effect on the supply of that good is:
Aa decrease as production cost rises
Ban increase as production cost falls
Cno change because subsidies affect only demand
Da movement up along the existing supply curve
Answer & Solution
Correct answer: B. an increase as production cost falls
1. A subsidy reduces the effective cost of production for the firm.
2. Lower cost raises profitability at each price.
3. Producers respond by offering more for sale, an increase in supply.
4. The answer is an increase in supply. A subsidy is a non-price factor, so it shifts the curve rather than causing a movement along it.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 2 Unit III "Supply", p.1_
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