Answer to Question #238792 in Microeconomics for salim

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? 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. (LO1, LO3, LO5)

Answer 1

The price will automatically accommodate the rising expenses incurred in the production process. Therefore, the price will rise at this point despite limiting lower income earners.

If the economy dips into recession, this indicates fall in sales. This will call for sellers to reduce prices to increase spendings within customers. Considering the fact that price reduction will lower profit, the small profit will accumulate in large number, stabilizing the operations.