Which of the following is an effect of a subsidy given to producers?

• A. The demand curve shifts to the left, resulting in a lower equilibrium quantity.
• B. The equilibrium price increases and the equilibrium quantity decreases.
• C. Producers receive less revenue for each unit sold.
• D. The supply curve shifts to the right, leading to a lower equilibrium price and higher equilibrium quantity.

Answer: (D)

Verified step by step guidance

1. Understand what a subsidy to producers means: it is a payment from the government that effectively lowers the producers' cost of production for each unit sold.
2. Recall that a subsidy reduces production costs, which encourages producers to supply more at every price level. This causes the supply curve to shift to the right (an increase in supply).
3. Analyze the effect of a rightward shift in the supply curve on the market equilibrium: with more supply available, the equilibrium price tends to fall because producers are willing to accept a lower price due to the subsidy.
4. At the same time, the equilibrium quantity increases because the lower price encourages consumers to buy more, and producers are willing to supply more due to the subsidy.
5. Conclude that the demand curve does not shift because the subsidy affects producers, not consumers, and producers receive more revenue per unit sold (price received plus subsidy), not less.