Which of the following best describes the effect of a subsidy to producers?

• A. It increases the equilibrium price above the original market price.
• B. It reduces the quantity supplied by making production less profitable.
• C. It lowers the cost of production, leading to an increase in supply.
• D. It raises the market price, causing a decrease in quantity demanded.

Answer: (C)

Verified step by step guidance

1. Understand what a subsidy to producers means: it is a payment from the government that lowers the producers' cost of production.
2. Recall the supply curve relationship: when production costs decrease, producers are willing to supply more at every price, which shifts the supply curve to the right (an increase in supply).
3. Analyze the effect on equilibrium: an increase in supply, with demand held constant, typically leads to a lower equilibrium price and a higher equilibrium quantity.
4. Evaluate the given options by comparing them to the economic theory: a subsidy does not increase the equilibrium price or reduce quantity supplied; instead, it lowers production costs and increases supply.
5. Conclude that the best description is the one stating that the subsidy lowers the cost of production, leading to an increase in supply.