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How does a per-unit subsidy affect a firm's output?

Posted on April 17, 2014 at 9:45 AM

A per-unit subsidy encourages more production by lowering marginal costs (MC shifts down). This will increase the firm's level of output and increase economic profits.

The average total cost and average variable cost curves also shift down, but it's the marginal cost curve that changes the profit-maximizing level of output as the MR=MC point has moved to the right.

AP Microeconomics Unit 2 Product Markets

Categories: AP Microeconomics, Micro Unit 2 Product Markets

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