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

The per unit cost of production would increase from $11 to $18 (an increase of $7 or 63.6%). This would lead to an increase in the price level and a decrease in real domestic output, shifting the aggregate supply curve to the left. The aggregate demand curve would not be affected by the change in input prices, so option C is incorrect. Option A is incorrect because the per unit cost of production would increase by more than $1.50. Option D is incorrect because the per unit cost of production would not decrease.

The Following Table Gives Information About the Relationship Between Input