AS Shift from Cost Changes

Steps:

• Assume diagram shows rightward AS shift, indicating lower production costs.
• Higher subsidies reduce firm costs, shifting AS right.
• Lower indirect taxes decrease cost burdens on producers, shifting AS right.
• Combination of higher subsidies and lower indirect taxes reinforces rightward shift.

Why C is correct:

• Subsidies and indirect taxes affect AS via production costs; higher subsidies lower costs (per cost-push theory), and lower indirect taxes reduce tax-inclusive prices, both expanding output at each price level.

Why the others are wrong:

• A: Higher taxes raise costs, offsetting subsidy benefits and likely shifting AS left.
• B: Lower subsidies increase costs, countering tax reductions for net leftward or no shift.
• D: Both changes raise costs, shifting AS left.

Final answer: C