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How does a lump-sum subsidy affect a firm's level of output?

Posted on April 17, 2014 at 9:50 AM

A lump-sum subsidy has NO EFFECT on a firm's level of output because a lump-sum subsidy does not change marginal costs. It reduces the firm's fixed costs and therefore shifts the average total cost down. This will increase a firm's economic profits, but not change output. If you see lump-sum subsidy or tax, DON'T CHANGE OUTPUT!

AP Microeconomics Unit 2 Product Markets

Categories: AP Microeconomics, Micro Unit 2 Product Markets

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