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. 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?
1. The price for the random access memory will

a. will not change

b. will increase

c. will decrease

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?

a. Yes - price will now decrease.

b. Yes - price will now be unchanged.

c. No - price will still increase.

d. Maybe - price may ultimately increase or decrease.

Answer 1

(1) (b)

An increase in cost of input will increase production cost, so producers will lower production and output. Market supply will fall, shifting supply curve leftward and increasing price.

(2) (d)

Higher input cost will lower supply and increase price. Lower consumer income will decrease demand, shifting demand curve to left and decreasing price. The net effect is uncertain. Price will rise, fall or remain unchanged on basis of whether the leftward shift in supply curve is higher than, lower than or equal in magnitude to the leftward shift in demand curve.