You are the manager of a midsized company that assembles personal computers. You

Question

You are the manager of a midsized company that assembles personal computers. You purchase most components – such as random access memory (RAM) – in a competitive market. Based on your marketing research, consumers earning over $80,000 purchase 1.5 times more RAM than consumers with lower income. One morning, you pick up a copy of the Wall Street Journal and read an article indicating that input components for RAM are expected to rise in price, forcing manufacturers to produce RAM at a higher unit cost. Based on this information, what can you expect to happen to the price you pay from RAM? Would your answer change if, in addition to this change in RAM input prices, the article indicates that consumer incomes are expected to fall over the next two years as the economy dips into recession? Explain.

Explanation / Answer

Solution :

If the input components for RAM are expected to rise in price then the price that is paid to purchase the RAM is also expected to rise as manufactuers of RAM will pass on the higher unit cost to buyers of RAM .

If the consumer incomes are expected to fall over the next 2 years , then the demand for RAM will also fall as consumers will have less income to spend on RAM . Therefore the demand for RAM will decrease with increase in price of RAM and decrease in income of consumers .

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