Question:
Suppose that the market supply curve is upward sloping and the demand curve is downward sloping. How does a unit subsidy on the product affect the consumer surplus and the producer surplus?
(1) Decreases / Decreases
(2) Decreases / Increases
(3) Increases / Increases
(4) Increases / Decreases
(5) Increases / No change
Correct Answer:
(3)
Answer Explanation:
A per-unit subsidy lowers the cost of production, shifting the supply curve down. This lowers the price consumers pay (increasing Consumer Surplus) and raises the effective price producers receive (increasing Producer Surplus). Both parties benefit.
Topic: Subsidies Year: 2018
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