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? Please explain in great detail.

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Explanation:

The price of RAM will increase if the cost of its inputs increases.

If the RAM inputs are expected to rise in price, forcing manufacturers to produce RAM at a higher unit cost, I expect them to sell RAM at a higher price. Consequently, my company will pay a higher price for RAM.

Manufacturers react to an increase in inputs cost by increasing the prices of their product. The price rise is to protect the manufacturer's margin, thereby keeping their businesses profitable.

No, my answer will still remain the same.

I would still expect to pay higher RAM prices, even if consumer incomes are projected to fall.  If the RAM input prices rise and manufacturers retain their prices, they will make losses. A reduction in consumer incomes will result in reduced demand for RAM. The percentage of customers earning over $80,000 will reduce, resulting in a decline in demand.  As the manager, I expect to pay higher RAM prices and the demand to drop due to the anticipated recession.

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