Suppose that a hypothetical economy has the following relationship between its real domestic output and the input quantities necessary for producing that level of output. (a) What is the level of productivity in this economy?
(b) What is the unit cost of production if the price of each input is $2.00?
(c) If the input price decreases from $2 to $1.50, what is the new per unit cost of production? What impact would this have on the short-run aggregate supply curve?
(d) Suppose that instead of the input price decreasing, the productivity had increased by 25%.What will be the new unit cost of production? What impact would this change have on the short-run aggregate supply curve?

Question

Suppose that a hypothetical economy has the following relationship between its real domestic output and the input quantities necessary for producing that level of output.  (a) What is the level of productivity in this economy?
(b) What is the unit cost of production if the price of each input is $2.00?
(c) If the input price decreases from $2 to $1.50, what is the new per unit cost of production? What impact would this have on the short-run aggregate supply curve?
(d) Suppose that instead of the input price decreasing, the productivity had increased by 25%.What will be the new unit cost of production? What impact would this change have on the short-run aggregate supply curve?

Quizplus · Accepted Answer

The Answer is (a) The level of productivity is 2 output units per input unit.
(b) Since productivity is 2 units of output per input unit and each unit of input costs $2, the cost of production per unit of output is $1 ($2/2 units).
(c) The unit cost will decline from $1 per unit to $.75 per unit.The short-run aggregate supply curve would shift rightward as a result of the decrease in input price.
(d) If productivity rose by 25%, then there would be 1.25 units produced per $1 of input costs.The unit cost of production would be $.80 per unit.The short-run aggregate supply curve would shift to the right.

Suppose That a Hypothetical Economy Has the Following Relationship Between