Starting from the "payoff matrix" situation in Question #22 above, suppose that a subsidy of $40 is now given to Firm H. Other things equal, with this subsidy, Firm H will __________.
A) always produce
B) never produce
C) only produce if Firm F does not produce
D) only produce if Firm F produces

Question

Quizplus · Accepted Answer

With a $40 subsidy, the marginal cost of Firm H decreases by $40. Therefore, if Firm H chooses not to produce, they will still incur a loss of $50 (since their fixed cost is $90). However, if they produce, their profit would be $10, which is greater than their loss of $50 if they do not produce. Therefore, Firm H will always choose to produce with the subsidy.

Starting from the "Payoff Matrix" Situation in Question #22 Above