Table of contents

0. Basic Principles of Economics1h 5m
1. Reading and Understanding Graphs59m
2. Introductory Economic Models1h 10m
3. The Market Forces of Supply and Demand2h 26m
4. Elasticity2h 26m
5. Consumer and Producer Surplus; Price Ceilings and Floors3h 45m
6. Introduction to Taxes and Subsidies1h 46m
7. Externalities1h 12m
8. The Types of Goods1h 13m
9. International Trade1h 16m
10. The Costs of Production2h 35m
11. Perfect Competition2h 23m
12. Monopoly2h 13m
13. Monopolistic Competition1h 9m
14. Oligopoly1h 26m
15. Markets for the Factors of Production1h 26m
16. Income Inequality and Poverty35m
17. Asymmetric Information, Voting, and Public Choice39m
18. Consumer Choice and Behavioral Economics1h 16m

6. Introduction to Taxes and Subsidies

Subsidies

Microeconomics

6. Introduction to Taxes and Subsidies

Subsidies

Previous problem

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Multiple Choice

The government wants to help producers of a life-saving machine, so they introduce a $1,000 subsidy per machine produced. Assuming that demand for this machine is inelastic, the subsidy will:

Increase the price paid by consumers by $1,000

Increase the price paid by consumers by less than $1,000

Decrease the price paid by consumers by less than $1,000

Have no effect on the price paid by consumers

Previous problem

Verified step by step guidance

Understand the concept of a subsidy: A subsidy is a financial assistance provided by the government to encourage the production or consumption of a good. In this case, the subsidy is $1,000 per machine produced.

Consider the effect of the subsidy on the supply curve: A subsidy effectively lowers the cost of production for producers, which shifts the supply curve to the right (or downward). This means that at every price level, producers are willing to supply more machines.

Analyze the demand elasticity: The problem states that the demand for the machine is inelastic. Inelastic demand means that consumers' quantity demanded does not change significantly with a change in price.

Determine the impact on consumer prices: With inelastic demand, the majority of the subsidy benefit will go to producers, but consumers will also see a decrease in the price they pay. However, because demand is inelastic, the price decrease for consumers will be less than the full $1,000 subsidy.

Conclude the effect on consumer prices: Since the subsidy shifts the supply curve and demand is inelastic, the price paid by consumers will decrease, but by less than the full amount of the subsidy, which is $1,000.