Subsidy Amount to Reach Target Quantity

Steps:

• Locate initial equilibrium at supply-demand intersection: quantity Q_o, price P_o.
• At target quantity Q_1, identify consumer price on demand curve (P_1) and producer price on original supply curve (P_2).
• Subsidy shifts supply rightward; per-unit subsidy equals vertical gap at Q_1 (P_2 - P_1).
• This gap, labeled as P_2 in the diagram, ensures new equilibrium at Q_1.

Why C is correct:

• Per economic theory, producer subsidy equals the difference between marginal cost (supply price at Q_1, P_2) and consumer willingness to pay (P_1), shifting supply to intersect demand at Q_1.

Why the others are wrong:

• A: P_o is initial equilibrium price; subsidy must exceed this gap to expand output.
• B: P_1 is post-subsidy consumer price; too small to cover producer costs at Q_1.
• D: P_3 likely an irrelevant or higher price; exceeds needed gap for Q_1.

Final answer: C