2. Suppose that a hypothetical economy has the following relationship between it

Question

2. Suppose that a hypothetical economy has the following relationship between its real output for producing that output: and the input quantities n Input Quantity 150.0 112.5 75.0 Real GDP $400 300 200 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 direction 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?

Explanation / Answer

a. Productivity= Quantity of output/Quantity of input

(b) Per unit cost = Total cost/ number of units produced

c.A rise in input prices will cause the aggregate supply to decrease and the AS curve to shift to the left. This is because at higher input prices producers are willing to produce less as the cost of production has gone up.

Leftaward shift in Aggregate Supply will lead to rise in price level and fall in real GDP.

productivity Input Real gdp (Output productivity 150 400 2.67 112.5 300 2.67 75 200 0.375

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