Suppose that a hypothetical economy has the following relationship between its real domestic output and the input quantities necessary for producing that level of output.
(a)What is the level of productivity in this economy?
(b)What is the unit cost of production if the price of each input is $2.00?
(c)If the input price decreases from $2 to $1.50,what is the new per unit cost of production? What impact would this have on the short-run aggregate supply curve?
(d)Suppose that instead of the input price decreasing,the productivity had increased by 25%.What will be the new unit cost of production? What impact would this change have on the short-run aggregate supply curve?
Definitions:
Operating Leverage
Operating Leverage is a measure of how revenue growth translates into growth in operating income, determined by the proportion of fixed versus variable costs a company has.
Variable Cost
Operational expenses of a business that alter in accordance with the level of activity.
Tax Rate
A tax rate is the percentage at which an individual or corporation is taxed on their income or profits.
Degree of Operating Leverage
A financial metric that measures the sensitivity of a company's operating income to its sales.
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