A profit-maximizing dairy farm is currently producing 10,000 gallons of milk per day. The government is considering two alternative policies. One is to give the farm a lump sum subsidy of $500 per month. The other policy is to give the farm a subsidy of $.05 per gallon of output.

1. Both kinds of subsidy will increase production at this farm.
2. Neither subsidy will affect production at this farm, since output is determined by profit maximization.
3. Production at this farm will be increased if the per-unit subsidy is adopted but not if the lump sum subsidy is adopted.
4. Which subsidy has the greater effect on production at this farm depends on whether fixed costs are greater than variable costs.