What is the effect of a subsidy being placed on a market?

• A. It lowers both the equilibrium price and equilibrium quantity.
• B. It lowers the equilibrium price and increases the equilibrium quantity.
• C. It raises the equilibrium price and decreases the equilibrium quantity.
• D. It has no effect on either equilibrium price or quantity.

Answer: (B)

Verified step by step guidance

1. Understand what a subsidy is: A subsidy is a payment made by the government to producers, which effectively lowers their production costs.
2. Analyze the supply curve: Since the subsidy reduces production costs, the supply curve shifts to the right (increases supply) because producers are willing to supply more at each price.
3. Determine the new equilibrium: With the supply curve shifting right, the new equilibrium is found where the new supply curve intersects the demand curve.
4. Examine the effects on equilibrium price and quantity: The increase in supply typically leads to a lower equilibrium price and a higher equilibrium quantity.
5. Summarize the impact: Therefore, a subsidy causes the equilibrium price to decrease and the equilibrium quantity to increase in the market.