Suppose that the table below shows an economys relationship

Suppose that the table below shows an economy\'s relationship between real output and the inputs needed to produce that output input Quantity Instructions: Round your answers to 2 decimal places. 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 $3? c. Assume that the input price increases from $3 to $4 with no accompanying change in productivity. What is the new per-unit cost of production? 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 What effect would this shift of aggregate supply have on the price level and the level of real output? d. Suppose that the increase in input price does not occur but, instead, that productivity increases by 75% percent. Instructions: Round your answer to 3 decimal places. What would be the new per-unit cost of production? 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 thet What effect would this shift of aggregate supply have on the price level and the level of real output?

Solution

(a)Level of productivity = Real GDP/Input quantity

=400/150

=2.66

It is 2.66 units of output per input unit.

(b)Price each input unit=$3

Cost of production per unit = Total input cost / output

=$3*150/400

=$450/400

=$1.12

(c)New per unit cost of production = $4*150/400

=$1.5

The aggregate supply curve would shift to the left because input price has increased so firm will supply less. Leftward shift of aggregate supply curve will increase prices and decrease level of real output.

(d)If productivity increases by 75% then that means new productivity will be (1.75)*(initial productivity)

=1.75*2.66

New productivity=4.655

New productivity = Real GDP/Input quantity

Real GDP=4.665*150

=699.75

New per unit cost of production=Total input cost/Real GDP

=$3*150/699.75

=$0.643

Since per unit cost of production has decreased so input price will decrease.The aggregate supply curve will shift right. The price level will decrease and level of real output will increase.