If the home country government grants a subsidy on a domestically produced good domestic producers tend to ?
Correct answer: B. Increase their level of production
- A. Capture the entire subsidy in the form of higher profits
- B. Increase their level of production
- C. reduce wages paid to domestic workers
- D. consider the subsidy as a increase in production cost
Explanation
A production subsidy lowers the effective marginal cost of producing the good, encouraging domestic firms to expand output. The subsidy is not necessarily captured entirely as profit because it can also affect prices, wages and resource use.
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