A monopoly firm is producing output OT and charging a price of OW for its product, which is how it is maximising profit, as the diagram shows. The government then judges that the firm’s activities create positive externalities, so it awards the firm a subsidy. If the firm still aims to achieve maximum profit, what will happen?
- AThe firm continues to produce OT, and price remains at OW.
- BThe firm continues to produce OT, but charges a lower price.
- CThe firm increases production above OT, and reduces price.
- DThe firm reduces production below OT, and reduces price by the amount of the subsidy.