Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Lump sum subsidies incentivize firms to produce more by lowering marginal costs.
B
Per unit subsidies provide ongoing support that directly affects production decisions.
C
Lump sum subsidies decrease the overall market supply by discouraging production.
D
Per unit subsidies are typically one-time payments that do not influence output decisions.
Understanding the Answer
Let's break down why this is correct
Answer
Lump sum subsidies are fixed amounts of money given to firms regardless of their level of production, while per unit subsidies provide a specific amount of money for each unit of product produced. Because lump sum subsidies do not change with production levels, they encourage firms to focus on overall efficiency and profit maximization without altering their output decisions directly. On the other hand, per unit subsidies incentivize firms to produce more, as they receive extra money for each additional unit sold. For example, if a firm receives a lump sum of $10,000, it might use that money to improve its technology, whereas if it receives $2 for every unit sold, it may increase production to maximize its subsidy. This difference in motivation can lead to varying strategies and outcomes for firms in terms of production and investment decisions.
Detailed Explanation
Per unit subsidies give money for each item produced. Other options are incorrect because Some might think lump sum subsidies lower costs for each item; It's a common mistake to think lump sum subsidies discourage production.
Key Concepts
Lump sum subsidies
Per unit subsidies
Market dynamics
Topic
Types of Subsidies
Difficulty
hard level question
Cognitive Level
understand
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