IB Economics HL Practice Test 2025 – Complete Exam Prep

The term "subsidy" refers to a payment made by the government to a firm per unit of output. Subsidies are designed to encourage production and can help lower the costs for businesses, making them more competitive in the market. By providing this financial support, the government aims to influence supply levels, support industries deemed important for economic growth, and sometimes address market failures.

In the context of government intervention, subsidies can lead to increased production and potentially lower prices for consumers. They can also create an incentive for firms to produce goods or services that might be underprovided in a free market scenario. This tool is widely used in various sectors, including agriculture and renewable energy, to support businesses and achieve specific policy goals.

The other terms listed—fixed costs, average cost, and variable costs—do not accurately describe a government payment to a firm. Fixed costs refer to expenses that do not change regardless of the level of production, average cost is the total cost of production divided by the quantity produced, and variable costs change with the level of output. Thus, they are not related to government payments per unit of output, which distinctly characterizes a subsidy.