Question

2. Suppose that a hypothetical economy has the following relationship between its real output and the input quantities necessary for producing that output: Input Quantity Real GDP 150.0 $400 112.5 300 75.0 200 a. What is productivity in this economy? b. What is the per-unit cost of production if the price of each input unit is $2? c. In what di rection would a $1 increase in input price push the economy's aggregate supply curve? What would cause such an increase? 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 100 percent. 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? What effect would this shift of aggregate supply have on the price level and the level of real output?

Answer 1

A).

Here we have given the “Real GDP” for different level of “Inputs”. The productivity is measured by the ratio of “aggregate output” to “inputs” used. So, the following table shows the productivity for different level of inputs.

Input Quantity Real GDP Productivity Calculation 2.67 "400/150" 150 400 2.67 "300/112.5" 300 112.5 2.67 "200/75" 75 200

B).

The per-unit cost of production is the “total cost” per unit of output. The price input is “$2”, the following table shows the “total cost” and the per unit cost.

Input Quantity Real GDP Total Cost Calculation Per unit Cost 400 300 "150*2" 150 0.75 225 "112.5*2" 112.5 300 0.75 200 150 "75*2" 75 0.75

C).

As the input price increases by “$1” increase the cost of production, => the SRAS will shifts upward. So, the equilibrium price increases and the output decreases.

AS2 AS1 E2 P1 E1 AD Y2 Y1 P2

Consider the above fig where the initial equilibrium is “E1” the intersection of “AS1” and “AD”. Now, as the input cost increases that shits the SRAS to “AS2”, => the new equilibrium is “E2” the intersection of “AS2” and “AD”. So, the equilibrium price increases and the output decreases.

D).

Let’s assume that the productivity increases by “100%” then the per unit cost of production also decrease the following table shows the new per unit cost.

Input Quantity Real GDP Total Cost Calculation New Real GDP Calculation Per unit Cost Calculation 300 "150 2" 800 "400*2" 0.375 "300/800" 150 400 600 "300 2" 0.375 "225/600" 0.375 "150/400" 300 225"112.5*2" 112.5 200 150 "75*2" 400 "200 2" 75

So, the per unit cost decreases to “0.375”. Now, as the per unit cost decreases the AS supply curve shift to the right side to AS2. So, the new equilibrium is “E2” the intersection of “AS2” and “AD”, => the equilibrium price decreases and the output increases.

AS1 AS2 Е1 P1 Е2 P2 AD >Y Y1 Y2