Question

Answer the question on the basis of the following information. 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. Refer to the information. If the per-unit price of raw materials rises from $4 to $8 and all else remains constant, the aggregate:

Answer 1

Answer:

currently (before the increase in raw materials), the cost of producing 1 unit = [(2 x $10) + (5 x $4) + (8 x $3)] / 640 = $64 / 640 = $0.10 per unit

if raw materials increase to $8, then production costs per unit = [(2 x $10) + (5 x $8) + (8 x $3)] / 640 = $84 / 640 = $0.13125 per unit

per unit costs will increase by ($0.13125 - $0.10) / $0.10 = 31.25%

when the price of inputs increase (e.g. raw materials), the aggregate supply curve shifts to the left, resulting in higher prices, lower total output and eventually higher unemployment.