What is most likely to happen when firms in an import-competing infant industry are offered subsidies?
A)The firms will suffer from diseconomies of scale.
B)The firms will be able to sustain only if they charge a higher price than the foreign firms.
C)The firms will be able to charge a price equal to the world price and still earn a profit.
D)The firms will face a perfectly inelastic demand curve.

Question

Quizplus · Accepted Answer

When firms in an import-competing infant industry are offered subsidies, they are able to reduce their costs and therefore lower their prices. This allows them to compete with foreign firms and sell their products at a price similar to the world price. However, the firms are still able to earn a profit due to the subsidies they receive. This is known as the infant industry argument which suggests that supporting domestic firms in their early stages will lead to long-term benefits for the economy.

What Is Most Likely to Happen When Firms in an Import-Competing