A local bakery receives a one-time lump sum subsidy from the government to help cover its operational costs. How is this type of subsidy likely to impact the bakery's production decisions in the short run compared to a per unit subsidy?

A one-time lump sum subsidy provides the bakery with a fixed amount of money to help with its costs, which can encourage the bakery to produce more in the short run. Since the subsidy does not depend on how many items they sell, the bakery may feel more secure about covering its expenses and might decide to increase production, hire more staff, or invest in better ingredients. In contrast, a per unit subsidy, which gives money for each item sold, would directly incentivize the bakery to increase production based on sales, making it more focused on selling more products. For example, if the bakery receives $10,000 as a lump sum, it might use that money to buy new ovens, while with a per unit subsidy, they would be motivated to sell more pastries to earn more money. Overall, the lump sum helps with immediate costs, but a per unit subsidy directly ties financial support to production levels.