A profit-maximizing dairy farm is currently producing 10,000 gallons of milk per day. The government is considering two alternative policies. One is to give the farm a lump sum subsidy of $500 per month. The other policy is to give the farm a subsidy of $.05 per gallon of output.
- Both kinds of subsidy will increase production at this farm.
- Neither subsidy will affect production at this farm, since output is determined by profit maximization.
- Production at this farm will be increased if the per-unit subsidy is adopted but not if the lump sum subsidy is adopted.
- Which subsidy has the greater effect on production at this farm depends on whether fixed costs are greater than variable costs.