To calculate the size of the welfare loss:
21 × base × height
= 21 × ($7−$5) ×(700 000 − 600 000) =$100 000
The cost of the subsidy is calculated using this equation:
subsidy per unit×equilibrium quantity post subsidy
=$2 ×700 000 units
=$1 400 000
Choices A and B overstate the welfare loss.
Choices B and C multiply the correct subsidy per unit by the incorrect quantity.