Question

An economy is employing 2 units of capital, 5 units of raw materials, and 8 units of labor to produce its total output of 640 units. Each unit of capital costs $10; each unit of raw materials, $4; and each unit of labor, $3. If the per-unit price of raw materials rises from $4 to $8 and all else remains constant, the aggregate:

A) supply curve would shift to the right.
B) demand curve would shift to the right.
C) demand curve would shift to the left.
D) supply curve would shift to the left.

Answer 1

The correct option is D. supply curve would shift to the left.

Step-by-step explanation:

From the scenario presented above, we can conclude that there was an increase in the cost of production, due to the increase in the cost of raw materials.

This increase in cost of raw materials will lead to the manufacturer buying less raw materials than usual, and this will in turn reduce the level of output of the manufacturer.

Therefore, this is shown by the aggregate supply curve shifting to the left because the price of a key input has risen.

On the contrary, aggregate supply curve shifts to the right when there is an increase in supply.