Question

If the government offers a tax deduction to companies producing solar panels, what will happen in...

If the government offers a tax deduction to companies producing solar panels, what will happen in the market for solar panels?

a) The supply curve will shift to the right, increasing supply.

b) The supply curve will shift to the right, decreasing supply.

c) The supply curve will shift to the left, increasing supply.

d) The supply curve will shift to the left, decreasing supply.

Please explain how you got the answer.

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Answer #1

As it is given that If the government offers a tax deduction to companies producing solar panels, then it leads to decrease in the cost of production of solar panels. As a result of the profitability of the firm's increases, so all the firms start producing more solar panels. Hence the supply of sollar panels increases and supply curve shifts rightward.

As a result, the equilibrium price will decrease and quantity supply will increases. All this has been shown in the below diagram.

Hence option A is the correct answer.

a) The supply curve will shift to the right, increasing supply.

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