Economics (AS & A Level) · Feb / March 2022 · Paper 32 · Question 10

A monopoly firm is producing output OT, and selling its product at price OW, thereby maximising its profits, as shown. The government now decides that the firm's operation generates positive externalities, and so gives the firm a subsidy. Assuming that the firm continues to seek maximum profit, what will result?

1. AThe firm continues to produce OT, and price remains at OW.
2. BThe firm continues to produce OT, but charges a lower price.
3. CThe firm increases production above OT, and reduces price.
4. DThe firm reduces production below OT, and reduces price by the amount of the subsidy.

As printed in the paper