Seat Belt Subsidy Impact on Supply and Demand
What will be the result of the government's decision to subsidize the production of seat belts?
A. The demand curve for seat belts will increase. B. The demand curve for seat belts will remain the same. C. The demand curve for seat belts will shift to the left. D. The supply curve for seat belts will shift to the left. E. The supply curve for seat belts will shift to the right.
Final Answer:
A government subsidy on seat belt production decreases production costs, leading to a rightward shift of the supply curve, which could result in more seat belts supplied at every price level and potentially lower prices.
Explanation:
When the government decides to subsidize the production of seat belts, it effectively lowers the production costs for seat belt manufacturers. This makes it cheaper for firms to produce seat belts, which has nothing to do directly with consumer demand, but rather with supply. As a result of the subsidy, the supply curve for seat belts will shift to the right, from S0 to S1. This is because, at every price level, producers are willing and able to supply more seat belts due to the lower cost of production. This shift reflects an increase in the quantity supplied at every price level, which could potentially lead to a lower market price for seat belts and an increase in consumption, assuming demand remains constant.
The new equilibrium will be at a higher quantity and potentially at a lower price, if the demand curve remains unchanged. The correct answer to the initial question is E. The supply curve for seat belts will shift to the right.