S.
Klepper, Economics 73-100, Fall
2009
Suppose
the government decides to subsidize both the variable and fixed costs of
automobile producers, paying 10% of the total variable costs and 20% of the
fixed costs of each producer. Automobile
producers would then be responsible for only 90% of their variable costs and
80% of their fixed costs.
Which
of the following statements concerning the effects of the subsidy in the short
run are correct? Mark true for a correct
answer and false for an incorrect one and provide explanations for each of
your answers.
_____1. The average total cost of production will fall by more than 10% at every level of output.
_____2. The marginal cost of production will fall by 10% at every level of output.
_____3. The minimum price in the short run at which automobile producers will supply a positive number of automobiles will fall by more than 10%.
_____4. The market supply curve of automobiles will shift to the right.
_____5. The market demand curve for automobiles will shift to the right.