In a competitive market, how does a per-unit subsidy paid to producers affect the supply curve?

• A. It has no effect on supply; only demand changes when subsidies are introduced.
• B. It shifts the supply curve downward (or to the right) by the amount of the subsidy at each quantity.
• C. It shifts the supply curve upward (or to the left) by the amount of the subsidy at each quantity.
• D. It causes a movement along the existing supply curve because the subsidy changes the market price.

Answer: (B)

Verified step by step guidance

1. Understand that a per-unit subsidy to producers effectively reduces their cost of producing each unit of the good by the amount of the subsidy.
2. Recall that the supply curve represents the relationship between the price producers receive and the quantity they are willing to supply, based on their costs.
3. Since the subsidy lowers the producers' costs, for any given market price, producers are now willing to supply more because their effective cost is lower.
4. This change causes the entire supply curve to shift downward (or equivalently to the right), reflecting that at each quantity, the price needed to supply that quantity is reduced by the subsidy amount.
5. Mathematically, if the original supply function is \(Q_s = S(P)\), after a per-unit subsidy of amount \(s\), the new supply function becomes \(Q_s = S(P + s)\), indicating the supply curve shifts by \(s\).