Producer Subsidy and Marginal Factor Cost
In the context of the graph above, how does an increase in the marginal factor cost (MFC) in a competitive factor market affect a firm’s decision when operating under the influence of a per-unit producer subsidy?
A
The increased MFC has no effect on hiring decisions because the subsidy only affects product prices.
B
The firm will hire more inputs since the subsidy fully compensates for any increase in factor costs.
C
The firm will switch from labor to capital entirely, rendering changes in MFC irrelevant.
D
The firm will hire fewer inputs, partially offsetting the output increase driven by the subsidy.
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