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Suppose that a hypothetical economy has the following relationship between its real output and the input quantities necessary for producing that level of output:
a. What is productivity in this economy?
b. What is the per-unit cost of production if the price of each input 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 did the $1 increase in input price push the economy’s aggregate supply curve? What effect would this shift in aggregate supply have upon 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 aggregate supply curve? What effect would this shift in aggregate supply have on the price level and the level of real output?