Answer to Question #62733 in Economics for James

Question

Apple outsources production of iPhones, iPads and other electronic devices to Taiwanese contract manufacturer, Foxconn, with 800,000 workers at factories in Shenzhen, Chengdu, and other locations in China. Faced with increased competition for labor, Foxconn has raised wages and increased benefits for its workers. In April 2012, Samsung sued Apple for violating various Samsung patents to produce mobile phones. a) Using a suitable diagram, explain how Apple should adjust its production and price if Foxconn raises its prices for contract manufacturing? b) Suppose that Apple must pay Samsung a royalty on each mobile device that it produces. How should Apple adjust its production and price in response to the royalty? c) How would you change your answer in (b) if Apple must pay a lump sum in damages rather than a royalty per unit produced?

Answer 1

a) Apple should decrease its production and increase price if Foxconn raises its prices for contract manufacturing, because its inputs costs increased and supply decreased.
b) If Apple must pay Samsung a royalty on each mobile device that it produces, then Apple should decrease its production and increase price in response to the royalty.
c) If Apple must pay a lump sum in damages rather than a royalty per unit produced, then its supply will not decrease, so its production and price will not change.