The demand and supply of pickles are given by Q^D = 300 - 500P and Q^S = 400P - 150, where P is the price per pickle and Q measures the quantity of pickles in millions. Suppose the government creates a subsidy of $0.25 per pickle. Which of the following statements are TRUE? A) II, III, and IV B) I and III C) II and IV D) I, III, and IV

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I. False. The subsidy does not affect the demand curve, only the supply curve. II. True. The subsidy of $0.25 per pickle will increase the supply of pickles by shifting the supply curve to the right, since producers will now receive more money for each pickle they produce. The new supply curve will be Q^D’ = 400P - 400. III. False. The equilibrium price will decrease, not increase, due to the increase in supply and the decrease in the cost to produce each pickle with the subsidy. The new equilibrium quantity will increase. IV. True. The government would need to spend $0.25 for each pickle produced, which would be a cost to taxpayers. The cost of the subsidy would depend on the quantity of pickles produced.

The Demand and Supply of Pickles Are Given by QD

The Demand and Supply of Pickles Are Given by Q^D