The following table gives information about the relationship between input quantities and real domestic output in a hypothetical economy:

-Suppose that the price of each input increased from $5 to $8.The per unit cost of production in the above economy would:
A) rise by $1.50 and the aggregate supply curve would shift to the right.
B) rise by 60 percent and the aggregate supply curve would shift to the left.
C) rise by 60 percent and the aggregate demand curve would shift to the left.
D) fall by $1.50 and the aggregate demand curve would shift to the right.

Question

The following table gives information about the relationship between input quantities and real domestic output in a hypothetical economy:
 
-Suppose that the price of each input increased from $5 to $8.The per unit cost of production in the above economy would:
A) rise by $1.50 and the aggregate supply curve would shift to the right. 
B) rise by 60 percent and the aggregate supply curve would shift to the left. 
C) rise by 60 percent and the aggregate demand curve would shift to the left. 
D) fall by $1.50 and the aggregate demand curve would shift to the right.

Quizplus · Accepted Answer

Since the price of each input has increased from $5 to $8, the per unit cost of production would increase by (8-5)/5 = 0.6 or 60%. This would lead to a shift in the aggregate supply curve to the left, as the higher cost of inputs would reduce the quantity of real domestic output supplied at each price level. Therefore, only option B is correct. Option A and D are incorrect because the per unit cost of production would increase, not decrease, and the aggregate demand curve would not be affected by a change in input prices. Option C is incorrect because the aggregate demand curve would shift to the right, not to the left.

The Following Table Gives Information About the Relationship Between Input