A decrease in a per unit production subsidy:

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Consider how a per unit production subsidy affects a seller's incentives. 
Option 1: 'increases supply.' With a decrease in the subsidy per unit, producers receive less financial support for each unit produced, making production less attractive. This reduces the quantity supplied at any given price, not increases it. 
Option 2: 'decreases supply.' Lowering the per unit subsidy reduces the net revenue producers earn from selling each unit, prompting fewer units to be supplied at each price. In standard supply analysis, a subsidy acts like negative cost for the producer; reducing it makes costs effectively higher, shifting the supply curve left and lowering quantity supplied. 
Option 3: 'does not change supply.' Since the subsidy directly affects producer incentives and net marginal revenue, changing the subsidy per unit should alter the quantity supplied. Claiming no change ignores the incentive effect subsidies have on producers. 
Option 4: 'changes supply in an indeterminate direction.' While many policy effects depend on context, the sign of this particular change is clear: decreasing a positive per unit subsidy reduces producer incentive and decreases supply; there isn’t ambiguity about the direction in standard theory. 
In summary, only the second option aligns with the intuitive and formal supply response to a reduced per unit subsidy, while the others misstate the impact or the determinacy of the effect.

ECON 201 Quiz 2: Ch 3 on S&D

A decrease in a per unit production subsidy:

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