An economy is employing 2 units of capital, 5 units of raw materials, and 8 units of labor to produce its total output of 640 units.Each unit of capital costs $10; each unit of raw materials, $4; and each unit of labor, $3.If the per-unit price of raw materials rises from $4 to $8 and all else remains constant, the per-unit cost of production will rise by about
A)100 percent.
B)50 percent.
C)40 percent.
D)30 percent.

Question

Quizplus · Accepted Answer

The per-unit cost of production is initially (10 x 2 + 4 x 5 + 3 x 8) / 640 = $2.50. After the price of raw materials rises, the per-unit cost becomes (10 x 2 + 8 x 5 + 3 x 8) / 640 = $3.50. The percentage increase in cost is [(3.50 - 2.50) / 2.50] x 100 = 40%.

An Economy Is Employing 2 Units of Capital, 5 Units