CA Foundation · Business Economics · Theory of Demand and Supply
The supply function of a good is Qs = −50 + 5P. The government grants a per-unit subsidy of ₹4 to producers, so that producers effectively receive P + 4 for each unit sold, where P is the market price paid by buyers. What is the quantity supplied at a market price of ₹20?
The quantity supplied is 70 units. With the ₹4 subsidy, producers receive an effective price of ₹24, and substituting into Qs = −50 + 5P gives −50 + 120 = 70. Using the market price of ₹20 alone would wrongly give 50 units.
- A50 units
- B70 unitsCorrect
- C30 units
- D100 units
Explanation
Producers receive an effective price of 20 + 4 = ₹24. Qs = −50 + 5(24) = −50 + 120 = 70 units. Ignoring the subsidy gives −50 + 100 = 50 units, which is the key mistake. Subtracting the subsidy gives 16, so Qs = 30 units, a sign error.
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