Question

Suppose that real domestic output in an economy is 50 units of widgets, the quantity of inputs is 10 and the price of each input is $2. If productivity increased such that 60 units of widgets are now produced with the quantity of inputs still equal to 10, then per-unit production costs would be ___________

Answer 1

Production costs per unit decrease from $0.40 to approximately $0.33 when productivity increases from producing 50 to 60 widgets with the same quantity of inputs.

Step-by-step explanation:

The student is asking about changes in production costs as a result of increased productivity without an increase in inputs. Initially, the economy produces 50 widgets with 10 inputs, each costing $2. Therefore, the total cost of inputs is $20. The per-unit cost of production for these widgets would thus be $20 / 50 units = $0.40 per widget.Now, productivity increases, and with the same quantity of inputs, 60 widgets are produced. The total cost of inputs remains at $20, but now these have to be spread over 60 units of widgets. Therefore, the new per-unit cost of production is $20 / 60 units = $0.33 per widget approximately.The increase in productivity leads to a decrease in per-unit production costs, which is beneficial for the economy as it can imply higher profitability for businesses or lower prices for consumers, or both.