Question

a.What is a unit sales subsidy?

b. How is price elasticity of demand related to a unit sales subsidy?

c. What might be the expected result of a unit sales subsidy applied to all brands of milk?

Answer 1

Reduces the cost of production and more is now being supplied at every price for the milk Lower the cost of necessary goods which might affects a major part of population. Example, subsidies given to essential food items and oil (in India).
Guarantee the supply of merit goods, which the government thinks consumers should consume.
Help domestic firms become more competitive in the international market, also known as protectionism.

Answer:-- A subsidy is an amount of money given directly to firms by the government to encourage production and consumption. A unit subsidy is a specific sum per unit produced which is given to the producer. The effect of a specific per unit subsidy is to shift the supply curve vertically downwards by the amount of the subsidy.

--The impact of subsidies on consumers will depend on the relative price elasticity of demand and price elasticity of supply.

Scenario 1: When PED is elastic relative to PES

The consumers do not benefit from a great fall but, because their demand is relative elastic, they increase their consumption by a significant amount.

Scenario 2: When PED is inelastic relative to PES

Consumption of the product is increased and so is the revenue of the producer.

The consumer benefit from a relatively large price fall, but their demand is relative inelastic, their consumption does not increase by a great amount.