Question

a.What is a unit sales subsidy?

b. How is price elasticity of demand related to a unit sales subsidy?

c. What might be the expected result of a unit sales subsidy applied to all brands of milk?

Answer 1

Answer a : Unit sale subsidy is a particular sum of amount per unit which is given by the government to producer. The effect of subsidy per unit is to shift supply curve vertical downward by the amount of subsidy.

b : Unit subsidy shift the supply curve vertical downward by the amount of subsidy. It depend upon the elasticity , the effect is to reduce price and increases output. If the good is perfectly elastic than reduction in prices increases quantity demanded where as if the good is perfectly inelastic than price reduction could increases quantity demanded.

Answer :C : Expected result of unit sale subsidy to all brands of milk are that:

• Price of the milk has been reduced which resulted in increasing demand.
• As milk is normal good and elastic demand when price reduce people start increases there consumption.