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 incomes.
1. 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 for random access memory?
2. Would your answer change if, in addition to this change in RAM input prices, the article indicated that consumer incomes are expected to fall over the next two years as the economy dips into recession? Explain.

Answer 1

Since the company is a mid sized company, with the increase in the price of the inputs of the RAM, the price of the RAM will definitely increase.

Explanation:

1) Since the price of the inputs of a particular good are one of the most important factors which determine the price of the goods, so with the increase in the inputs of the price of the inputs of the good, the price of the good will increase.

2) With the fall in the income of the consumer, the expenditure of the consumer will also decrease. So the demand of the RAM will fall because of two reasons a) increase in the price of RAM and 2) with the fall in the income of the consumer.