CA Foundation · Business Economics · International Trade
A domestic producer in India is given a production subsidy of ₹8 per unit by the government, while imports of the same good face no restriction. Which of the following is the most likely result?
Domestic output is likely to expand. A subsidy of ₹8 per unit lowers the producer's effective cost, so supply rises and the firm can compete better against imports. It does not impose any physical limit on imports and does not directly change the world price.
- ADomestic output expands because the producer's effective cost per unit fallsCorrect
- BDomestic output contracts because the subsidy raises costs
- CImports are limited to a fixed physical quantity
- DThe world price of the good rises by ₹8
Explanation
A per-unit subsidy lowers the producer's effective marginal cost, so the firm supplies more at each market price and domestic output expands. It does not cap imports, which would be a quota, and it does not directly change the world price. The government bears the cost through higher expenditure.
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