How does a per-unit subsidy affect the simple monopoly equilibrium?
A) The subsidy does not affect marginal cost and thus does not affect the monopoly equilibrium.
B) The subsidy lowers the price charged by the monopoly,but it also lowers social gain.
C) The subsidy increases the monopoly's profit but does not improve social gain.
D) The subsidy causes both monopoly output and social gain to increase.

Question

Quizplus · Accepted Answer

A per-unit subsidy will shift the monopolist's marginal cost curve downward by the amount of the subsidy. This will induce the monopolist to produce more output and reduce the price charged to consumers. Both the monopoly output and social gain will increase as a result of the subsidy. However, the increase in social gain may not necessarily be optimal as the subsidy itself involves an opportunity cost for taxpayers.

How Does a Per-Unit Subsidy Affect the Simple Monopoly Equilibrium