The government wants to help producers of a life-saving machine, so they introduce a $1,000 subsidy per machine produced. Assuming that demand for this machine is inelastic, the subsidy will:

• A. Increase the price paid by consumers by $1,000
• B. Increase the price paid by consumers by less than $1,000
• C. Decrease the price paid by consumers by less than $1,000
• D. Have no effect on the price paid by consumers

Answer: (C)

Verified step by step guidance

1. Understand the concept of a subsidy: A subsidy is a financial assistance provided by the government to encourage the production or consumption of a good. In this case, the subsidy is $1,000 per machine produced.
2. Consider the elasticity of demand: The problem states that the demand for the machine is inelastic. This means that consumers' quantity demanded does not change significantly with a change in price.
3. Analyze the effect of the subsidy on supply: A subsidy effectively lowers the cost of production for producers, which shifts the supply curve to the right, indicating an increase in supply.
4. Determine the impact on equilibrium price: With an inelastic demand, the increase in supply will lead to a decrease in the equilibrium price, but the price paid by consumers will decrease by less than the full amount of the subsidy.
5. Conclude the effect on consumer price: Since the demand is inelastic, the price paid by consumers decreases by less than $1,000, as the subsidy is partially absorbed by producers in the form of increased production and sales.