Question

Suppose that the table below shows an economy's relationship between real output and the inputs needed to produce that output:LO4 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. Assume that the input price increases from $2 to $3 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? 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

Productivity growth results in a rightward shift of the aggregate supply curve, increasing output, while increases in input prices cause a leftward shift, reducing output or raising prices. Immigration policy changes can also affect the labor market and, by extension, the aggregate supply and demand curves.

Step-by-step explanation:

The concept of productivity pertains to the value of what is produced per worker or per hour worked and is reflected in economy's GDP per capita. Productivity growth impacts the aggregate supply curve (AS curve) by shifting it to the right, leading to an increase in output at the same price levels. Conversely, an increase in input prices, such as for energy, will shift the AS curve to the left, indicating a decrease in output or higher prices for the same output levels.

If we take an example where productivity unexpectedly increases, this would push the demand for labor to the right, potentially resulting in very low unemployment and increased real wages if the wages are not immediately adjusted to reflect the productivity gains. However, if input prices rise without an increase in productivity, such as from $2 to $3, we would observe an increase in per-unit cost of production, which could decrease output and increase price levels, shifting the aggregate supply curve to the left.

Additionally, policy changes such as immigration reform can impact the labor market and aggregate demand/supply. For instance, making it more difficult for foreigners to work in the country could restrict the labor supply, potentially raising wages but also possibly reducing the overall economic output and increasing the price levels, impacting the AS curve.

Answer 2

a. Productivity in this economy is $2.67 per unit of input. b. The per-unit cost of production is $0.0133 per unit with an input price of $2. c. With an increase in input price to $3 and no change in productivity, the new per-unit cost of production is $0.02 per unit. This would push the economy's aggregate supply curve to the left and result in higher prices and lower output.

Step-by-step explanation:

a. Productivity in this economy can be calculated by dividing the real GDP by the total input quantity. In this case, the productivity can be calculated as $400/150 = $2.67 per unit of input.

b. The per-unit cost of production can be calculated by dividing the total cost of inputs by the total input quantity. In this case, with an input price of $2, the per-unit cost of production is $2/150 = $0.0133 per unit.

c. With an increase in input price from $2 to $3, and assuming no change in productivity, the new per-unit cost of production can be calculated as $3/150 = $0.02 per unit. The increase in input price would push the economy's aggregate supply curve to the left, resulting in higher per-unit production costs. This shift of aggregate supply would likely lead to an increase in the price level and a decrease in the level of real output.

d. If productivity increases by 100 percent, the new per-unit cost of production can be calculated as $400/150 = $2.67 per unit. This change in per-unit production cost would shift the economy's aggregate supply curve to the right, resulting in lower per-unit production costs. This shift of aggregate supply would likely lead to a decrease in the price level and an increase in the level of real output.