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 total initial cost of production is calculated as follows: Capital cost = 2 units * $10 = $20, Raw materials cost = 5 units * $4 = $20, Labor cost = 8 units * $3 = $24. So, the total initial cost = $20 + $20 + $24 = $64. The total output is 640 units, so the initial per-unit cost = $64 / 640 units = $0.10 per unit. After the price increase, the cost of raw materials becomes 5 units * $8 = $40. The new total cost = $20 (capital) + $40 (raw materials) + $24 (labor) = $84. The new per-unit cost = $84 / 640 units = $0.13125 per unit. The increase in per-unit cost = $0.13125 - $0.10 = $0.03125. The percentage increase = ($0.03125 / $0.10) * 100% ≈ 31.25%, which is closest to 30 percent.

An Economy Is Employing 2 Units of Capital, 5 Units