Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
They decrease production costs, encouraging firms to produce more, which can improve market efficiency.
B
They only benefit consumers by lowering prices without affecting production levels.
C
They lead to overproduction because firms will produce regardless of market demand.
D
They eliminate the need for firms to consider marginal costs in their production decisions.
Understanding the Answer
Let's break down why this is correct
Answer
Per unit subsidies are payments made by the government to firms for each unit of a good they produce. This financial support lowers the cost of production for the firm, encouraging them to produce more goods. For example, if a firm receives a subsidy of $2 for each product made, it might choose to produce 100 more units because it can cover its costs better and earn more profit. However, while this can help the firm grow, it may also lead to market inefficiencies, like overproduction, where too many resources are used to make a product that might not be needed. In the long run, these subsidies can distort market signals, making it harder for firms to make decisions based on actual consumer demand.
Detailed Explanation
Subsidies lower the cost of making products. Other options are incorrect because This idea suggests that only consumers gain from subsidies; This option thinks firms will make too much without caring about demand.
Key Concepts
Per Unit Subsidies
Market Efficiency
Production Decisions
Topic
Per Unit Subsidies in Economics
Difficulty
medium level question
Cognitive Level
understand
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