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

When the price of inputs increases from $5 to $8, the per unit cost of production will increase by a factor of 8/5 or 1.6 or 60%. This is because the total cost of each unit of output will increase by 60% due to the increase in input prices.

As per the table, when the cost of production increases, the level of output for any given set of input quantities will decrease. Thus, the aggregate supply curve will shift to the left.

Therefore, the correct choice is B, i.e., the per unit cost of production would rise by 60% and the aggregate supply curve would shift to the left.

The Following Table Gives Information About the Relationship Between Input