Subsidy Effects on Inelastic Demand

Steps:

• Subsidy reduces producer costs, shifting supply curve rightward.
• New equilibrium has lower price and higher quantity.
• Inelastic demand means small percentage increase in quantity despite price drop.
• Thus, percentage price fall exceeds percentage quantity rise.

Why B is correct:

• Elasticity definition: for inelastic demand (|Ed| < 1), %ΔQ < %ΔP, so supply shift causes larger % price drop than % quantity rise.

Why the others are wrong:

• A: Quantity rises, not falls.
• C: Quantity rises, not falls; also reverses inelastic effect.
• D: Reverses inelastic effect; % price fall is larger, not smaller.

Final answer: B