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Economics Question on Subsidies

lauz94 · 2013-11-15 19:44:52

Stuck on this question.. Explain using isoquants and isocost lines, why a producer would prefer a general subsidy (on all inputs/factors of production) to an equal-cost subsidy on only one input/factor of production? What policy factors may incline the government towards the latter? I know that the latter results in no…

15-11-2013 7:44pm

#1

lauz94

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Join Date: June 2012

Posts: 124

Stuck on this question..
Explain using isoquants and isocost lines, why a producer would prefer a general subsidy (on all inputs/factors of production) to an equal-cost subsidy on only one input/factor of production?
What policy factors may incline the government towards the latter?

I know that the latter results in no change in price and that the new budget line will have the same slope as the original. Also in the first case, the budget line will pivot outwards to reflect the decrease in the price of one factor.

If anyone could shed a bit more light on the intuition behind this question it would be much appreciated!

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