Costa rican supplier and their contract
Macroeconomics
Dell Electronics just stumbled upon a new supplier of personal computer (PC) circuitry in Costa Rica that can supply standardized computer inputs at $70 per PC. This is $45 less than the price offered by U.S. suppliers (the only other source of such circuitry). The Costa Rican supplier uses an innovative combination of labour and capital to enable lower production costs.
Defects in circuitry can cause permanent failure in a PC and Dell requires specialized quality to protect a reputation of dependability in the market. Due to intense global competition in the circuitry market, Dell expects the supplier’s cost advantage to diminish by $15 a year relative to the market. Because Dell requires the lowest rates of product defect in the industry, the supplier will charge Dell $80 per PC if a contract is signed between the two parties. The $10 premium reflects extra investment the supplier must make to meet Dell’s standards. Assume that U.S. suppliers do not require this type of premium in their contracts with Dell (i.e., nothing is added to the going market price in a contract with them).
Should Dell acquire this circuitry through spot exchange or sign a contract with the Costa Rican supplier? If a contract were to be signed, what is the contract’s optimal length? Explain your reasoning in complete terms.
