Question

Bernice Jenkins is the CEO of Pear MePhone Corporation. Pear buys the majority of the components for its phones from third-party suppliers, then uses the components to assemble it's MePhone. One of the major components of the phone, the processor, will double in price next month and the price will be sustained for the foreseeable future.

Pear experienced a 200% increase in phone sales last year and is considering doubling its Workforce so it can assemble more phones. With the news of the increase in the price of the processor, should Pear move forward with its plans to double its Workforce?

Why?

Answer 1

Processor is the important component of the phone and price of the processor is getting doubled. It means that the price of the phone will increase. Further, with increase the price, demand of the phone will come down. Besides, the supply of phones will also come down with increase in input factors of the production and it will shift to the left direction. As a result, a new equilibrium will be achieved at higher price and less than double of the demand of the phones in the market. Thus, the Pear should not double the workforce as it will further increase the cost of production (wages, salary).