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 $\mathbf{\$}\mathbf{80}\mathbf{,}\mathbf{000}$purchase$\mathbf{1}\mathbf{.}\mathbf{5}$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

Short answer

The price of Random Access Memory (RAM) will go up.

If the article indicates that consumer earnings will fall in the next two years, the response will remain the same.

Step-by-step solution

Defining consumer income

Consumer income refers to the money earned by a consumer through employment or investment, such as dividends paid to shareholders by corporations and gains realized on the sale of an asset, such as a home.

Explanation

If RAM input component prices are expected to rise, the RAM manufacturers will limit supply as the inputs will be more expensive. As a result of the decrease in supply, the RAM supply curve will shift to the left, causing the market price of RAM to climb.

The following graph explains the situation. The first point of equilibrium for RAM comes when the demand equals the supply. The supply curve shifts from left to right as the price of the input rises. The market for RAM has risen due to the supply curve shift.

If the article stated that consumer earnings would fall in the next two years as the economy entered a recession, the response would remain the same. With falling income, people’s ability to buy Ram will fall.