Question

Input Quantity	Real GDP
300.00	$400
225.00	300
150.00	200

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

b. What is the per-unit cost of production if the price of each input unit is $4?

c. Assume that the input price increases from $4 to $5 with no accompanying change in productivity. What is the new per-unit cost of production?

c2. In what direction would the $1 increase in input price push the economy's aggregate supply curve? (right or left)

c3. What effect would this shift of aggregate supply have on the price level and the level of real output?

d. What would be the new per-unit cost of production?

d2. In what direction would this change in per-unit production cost push the economy's aggregate supply curve? (right or left)

d3. What effect would this shift of aggregate supply have on the price level and the level of real output?

Answer 1

(a)

Input quantity	Real GDP	Productivity
300	400	1.33
225	300	1.33
150	200	1.33

Productivity = Real GDP / Input Quantity.

Productivity is 1.33

(b) Price of each input unit is $4

Input quantity	Total Cost	real GDP	Per unit cost
300	1200	400	3
225	900	300	3
150	600	200	3

Total cost = input price * input quantity.

Per unit cost = Total cost / real GDP.

Per unit cost is $3.

(c) Input price increases from $4 to $5.

Input quantity	Total Cost	real GDP	Per unit cost
300	1500	400	3.75
225	1125	300	3.75
150	750	200	3.75

New per unit cost of production is $3.75.

(c2) The economy's aggregate supply curve would shift to the left due to a $1 increase in input price.

(c3) As the aggregate supply curve shifts leftward, the equilibrium price level will rise and the equilibrium level of real output will fall.

(d) New per unit cost of production is $3.75.

(d2) The economy's aggregate supply curve would shift to the left due to an increase in per-unit production cost.

(d3) As the aggregate supply curve shifts leftward, the equilibrium price level will rise and the equilibrium level of real output will fall.

Note: Per unit production cost rise to $3.75 due to an increase in input price by $1. Hence, the effect of both (i.e., increase in input price and increase in per-unit cost) would be the same.