Question

2. The market for computers is initially in equilibrium. As the manager of an American firm, supply chain problems in China have made processors your firm uses twice as expensive. Conduct a supply and demand analysis, fully modeling, labeling, and commenting on your outcome.

Answer 1

We know processors are an input in computer. As processors become twice as expensive, the cost of inputs rises which leads to a higher cost of production and therefore supply curve for computers shift to the left as shown below:

As can be seen in the diagram, initial equilibrium price is Po and initial equilibrium quantity is Qo. When price of processors rise, supply curve for computers shift to the left which in turn leads to a higher equilibrium price and lower equilibrium quantity.