Question

Suppose that the table below shows an economy’s relationship between real output and the inputs needed to produce that output:

Input Quantity	Real GDP
75.00	$400
56.25	300
37.50	200

a. What is the level of productivity in this economy?

Instructions: Round your answer to two decimal places.

b. What is the per-unit cost of production if the price of each input unit is $5?

Instructions: Round your answer to two decimal places.

$

c. Assume that the input price increases from $5 to $6 with no accompanying change in productivity.

What is the new per-unit cost of production?

Instructions: Round your answer to two decimal places.

$

In what direction would the $1 increase in input price push the economy’s aggregate supply curve?

The aggregate supply curve would shift to the   (Click to select)   right   left  .

What effect would this shift of aggregate supply have on the price level and the level of real output?   (Click to select)   Both price level and real output would remain the same.   Price level would increase and real output would decrease.   Price level would decrease and real output would increase.   Price level would decrease and real output would remain the same.

d. Suppose that the increase in input price does not occur but, instead, that productivity increases by 25% percent. What would be the new per-unit cost of production?

Instructions: Round your answer to three decimal places.

$

What effect would this change in per-unit production cost have on the economy’s aggregate supply curve?

The aggregate supply curve will shift to the   (Click to select)   left   right  .

What effect would this shift of aggregate supply have on the price level and the level of real output

Answer 1

Ans.

a) Level of productivity = Sum of all GDP (Total Ouput) / Sum of all quantity ( Total Input )

                                      = ( 400 + 300 + 200 ) / ( 75 + 56.25 + 37.50 )

                                      = 900 / 168.75

                                       = 5.33

b)

Pre unit cost of production = Price per unit x (Sum of all quantity ( Total Input )) / Sum of all GDP (Total Ouput)

                                           = 5 x 168.75 / 900

                                           = 843.75 / 900

                                           = 0.94 (approx.)

c)

Pre unit cost of production at $6 = Price per unit x (Sum of all quantity ( Total Input )) / Sum of all GDP (Total Ouput)

                                                   = 6 x 168.75 / 900

                                         = 1012.5 / 900

                                             = 1.13 (approx.)

Correct Option is - Price level would increase and real output would decrease

This increase will make the supply curve to go left . that that shidt it will increase the price and there will be a decrease in quantity.

d)

25% increase in productivity = 25% of 900 = 225

New productivity(25% increased) = 900 + 225 = 1125

Pre unit cost of production = Price per unit x (Sum of all quantity ( Total Input )) / New productivity(25% increased)

                                           = 5 x 168.75 / 1125

                                           = 843.75 / 1125

                                           = 0.75

Hence it will make the per unit cost of production to decrease from 0.94 to 0.75 . Thus the supply curve will shift to right , which will make the price to decrease and quantity will increase.

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