I have a Late 2006 2.33GHz Core 2 Duo 20-inch iMac with 2GB of RAM. I can install 4GB of RAM but the computer will only recognise 3. Sometimes my computer can slow down when I have lots of applications running or when Lion does one of it's fancy transitions. Should I upgrade my RAM?
For the transitions, probably not because thats more of a graphics performance issue and I believe that your iMac has discrete graphics (which means that freeing up memory won't increase your graphics performance).
As for general slowdown, yes there is a very good chance that having more RAM installed will increase the overall responsiveness of your computer. But lets not guess, there is a very easy way to know for sure:
Open the applications that you might be using during a heavy load, and then open Activity Monitor. Go to the "System Memory" tab at the bottom. You should see this:
Free memory is completely unused
Wired memory is in use by the OS
Active memory is in use by active applications
Inactive memory is cached data from recently closed applications
All I have open is Chrome, Illustrator, and Activity Monitor, and just with that I'm using about 2.2GB of memory between the OS and active apps, plus the computer is cashing another 800MB of application data so that in case I reopen a recently used app, it can load straight from the memory (much faster than having to load from the hard drive).
In my case, 2GB of RAM wouldn't even be enough for the Wired and Active memory. This means that my computer would have to use the hard drive as virtual memory, drastically slowing down the computer. The fact that I can often load apps straight from my unused RAM also makes the computer feel a lot faster.
Maybe apple has programed OS X Lion so that if it knows you only have 2GB of memory, it will load fewer resources in the Wired memory by default, but this just means that you're going to have to go back to the hard disk more often to load whatever files you specifically need.
Considering that I am using 2.2GB of memory with just 2 or 3 apps open, I really think that it would be worth the low cost to upgrade your memory to 3GB. But you can check your Activity Monitor for yourself.