Question

Suppose that real domestic output in an economy is 20 units, the quantity of inputs is 10, and the price of each input is $4.

Refer to the information above. All else being equal, if the price of each input increased from $4 to $6, productivity would :

(Choices below)
A) Fall from 2 to 3
B) Remain unchanged
C) Rise from 2 to 1
D) Fall from .50 to .33

Answer 1

Productivity, defined as the output per unit of input, remains unchanged at 2 units per input even if the price of each input increases from $4 to $6, since the change in input price does not affect the output quantity per input.

Step-by-step explanation:

If the price of each input increased from $4 to $6, productivity would remain unchanged. Productivity is measured by the output per unit of input. In this scenario, the real domestic output is 20 units, and the quantity of inputs is 10. No matter the price of inputs, productivity in this example is 20 units / 10 inputs = 2 units per input. Therefore, a change in the price of inputs does not affect the number of units produced per input. Profit-maximizing output level, while not directly asked about in the student's question, would be impacted by the cost of inputs, but this would influence the profit margin rather than productivity itself. In the economy, firms would need to consider whether to adjust prices or absorb the increased costs to maintain their market position.